Nelson, Swan and RBA Independence
Treasurer Wayne Swan, responding to opposition leader Brendan Nelson’s view that the RBA has gone too far in raising interest rates, says that:
The fact that Dr Nelson and the Liberals can’t decide whether they still support the independence of the Reserve Bank or not shows just how badly the Liberals have lost their way on the economy.
This is a common misunderstanding of what it means for the RBA to be independent of government. At its most basic, RBA independence means that it is free to set interest rates without the approval of the Treasurer. The RBA enjoys what is often called ‘operational independence.’
This is no sense precludes the government or opposition from taking a different view on monetary policy to the RBA or being publicly critical of central bank policy actions. The RBA has been made progressively more independent of government precisely in order to facilitate differences of opinion with government. Divided authority in relation to monetary and fiscal policy is a valuable institutional protection against macroeconomic policy mistakes. Under the Reserve Bank Amendment (Enhanced Independence) Bill, the RBA Governor will enjoy such a high level of statutory independence that public criticism could hardly be viewed as a threat to the Governor’s position.
By the same token, the RBA would not be compromising its independence by speaking out on issues relating to its statutory responsibilities, provided it does so in a non-partisan fashion. Former RBNZ Governor Don Brash would frequently lecture the New Zealand government on structural issues, because monetary policy is necessarily conditioned on structural factors over which the central bank has no direct control. Brash would frequently point out that if politicians want strong growth, together with low inflation and low interest rates, then various structural measures outside the scope of monetary policy could assist in this task. When he was Chairman of Federal Reserve, Alan Greenspan would also publicly canvass a wide-range of economic policy issues beyond the immediate scope of monetary policy.
In Australia, by contrast, mistaken notions of RBA independence are used to suppress public debate over economic policy.
posted on 08 April 2008 by skirchner in Economics, Financial Markets, Politics
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Glenn Milne’s Thinly Disguised Class Warfare
Glenn Milne joins the tabloid attack on Glenn Stevens, complaining that the RBA Governor is not phoney enough:
Central bankers might argue that they’re not meant to behave like politicians. But the reality of public life is that if you are the individual who is seen to have the power to decide whether people keep a roof over their heads, you must behave in an accountable fashion, or at least pretend to.
Stevens is not behaving in this way.
The whole point of having an independent central bank is to have economic policymakers who will tell it like it is and not give in to economic populism. Milne says that ‘Stevens now has few friends in Canberra.’ That is how it should be. A more adversarial relationship between the RBA and politicians would strengthen, not weaken, public accountability in the conduct of economic policy.
Then there is this bizarre and nonsensical bit of parochialism:
Stevens, with his Teutonic lustre and mid-Atlantic conference accent, comes from nowhere recognisable in the Australian suburban landscape…
Glenn Stevens can do no more about his appearance than Glenn Milne. Stevens actually looks and sounds more authentically Australian to me than Milne, but what of it? Milne is indulging in thinly disguised class warfare.
The unfortunate consequence of these tabloid attacks is that it will make the RBA’s senior officers even less willing to maintain a public profile, weakening the very accountability Milne says he is in favour of.
posted on 07 April 2008 by skirchner in Economics, Financial Markets, Politics
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Upstaged by a Teenage Economist
The first appearance by RBA Governor Stevens before the House Economics Committee since last year’s federal election saw very little change in the dynamics of these hearings. Rather than seeking to hold the Governor accountable for inflation outcomes, Committee members continue to treat the Governor as an oracle whose main role is to adjudicate in their partisan disputes. Instead of criticising the Bank’s conduct of monetary policy, Coalition members tried to enlist the Governor into their inflation denialism. Both government and opposition members continued to ask questions that are simply outside the Governor’s statutory responsibilities.
Committee members were then well and truly upstaged by one of the high school students invited to submit questions to the RBA Governor:
Ardi Astarto—Good morning. In an article published in the American Economic Review in 1995 the economist Carl Walsh argued that governments should impose a personal financial penalty on their central bank governors if they failed to meet their set inflation targets and that the further the actual inflation rate is from the target the greater the penalty should be. This idea is supported in principle by the current governor of the US Federal Reserve, Ben Bernanke. Do you support or are you opposed to being made accountable for your decisions in this way?
Mr Stevens—That is an interesting proposition. To my knowledge no country has actually implemented it—that could be because central bank governors cannot actually control inflation exactly over short periods; there are other things that impinge on it. It could also be that you do not actually want the governor to try to control inflation too closely over a very short period; otherwise you may find that the rest of the economy is swung around more than it needs to be. So that is why our system is actually for a flexible target that lets us bring inflation back on course gradually so that we do not do too much damage to other things in the process. As for my own remuneration, that is set by my board, and I gratefully accept whatever they choose to give me.
It says a lot about the politics of monetary policy in Australia that the only person who knows what they’re doing in these hearings is still in high school.
Deputy Governor Ric Battellino did a good job laying to rest the myth of mass mortgage stress:
Over the past couple of decades, as Glenn has mentioned, we have moved to a system where finance is readily available in the community. That is in marked contrast to where we were in the 1970s, where basically the average person had a great deal of difficulty getting money from a bank. In the current system the onus is more now on the individuals to be careful about accessing finance. Thirty years ago, basically it was less likely that people got themselves into trouble, because money was not available. I have seen the program. It is hard to draw general conclusions from a program like that, because, in the end, there were very few people on that program. There is no doubt that in a community of 20 million people there are going to be some people in trouble. But looking across the whole economy the figures show—I think our calculations are—there are 15,000 people in the whole of Australia who are running 90 days overdue on their housing loans. The aggregate figure is not a lot of people and, as Glenn said, recently it has been coming down again.
More in this week’s Business Spectator column.
posted on 05 April 2008 by skirchner in Economics, Financial Markets
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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 29 March 2008 by skirchner in Economics, Financial Markets
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A ‘New Era’ for the Reserve Bank?
I have an op-ed in today’s Age on the proposed Reserve Bank Amendment (Enhanced Independence) Bill, which is a brief summary of a more detailed article that will be forthcoming in Policy. The op-ed concludes:
While formally enhancing the independence of the RBA, the new arrangements leave it operating under an outdated and internationally anomalous governance structure that is incompatible with modern demands for central bank transparency and accountability.
UPDATE: Full article can be found here.
posted on 27 March 2008 by skirchner in Economics, Financial Markets
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The Gittinomics of Stink
Ross Gittins wants you to wash less and stink more:
In the old days, if you got a bit sweaty you allowed the sweat to dry and thought nothing of it. These days, many people can’t rest until they’ve showered.
And then there’s underarm body odour. It’s completely and utterly natural, we all have it, but since the spread of deodorant we’ve convinced ourselves it’s offensive and a sign of ill-breeding.
So, much of our incessant showering arises not from a desire to be clean but from a relatively modern desire not to have a smell. I suspect many people have a quite exaggerated notion of the extent to which they smell - or would smell if they didn’t take as many showers as they do.
Many of us feel a social obligation to maintain what we believe to be the prevailing standard of personal washedness.
posted on 26 March 2008 by skirchner in Economics
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Central Banking for Monarchists
From the not-always-reliable Real Time Economics blog:
and the exception, the Royal Bank of Australia, which has been raising rates lately to fight inflation in the commodity-rich economy, to boost its key rate from 7.25% to 7.5% later this year.
posted on 21 March 2008 by skirchner in Economics, Financial Markets
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Meganomics: Demand Without Supply
George Megalogenis’s proposed solution to record low housing affordability – make investment in housing less attractive through higher taxes:
It can only be done by making property less attractive than other investments…bricks-and-mortar should lose its taxpayer supports.
The analytical error Megalogenis makes is to assume that the attractiveness of housing as an investment only contributes to demand and higher house prices, but not to supply. It is the same error he and many others make in assuming that tax cuts are necessarily inflationary, contributing only to demand, while the supply-side of the equation is completely ignored. Megalogenis is not alone in this. Chris Richardson has also argued that abolishing the principal residence exemption from capital gains tax would improve housing affordability, because he views house prices as being largely driven by demand and not supply.
As we have noted previously, the record low in housing affordability has only one solution: build more houses. A very simple reform that would quickly address Australia’s growing shortage of dwelling stock and its inflationary consequences would be to abolish capital gains tax on investment property, to put it on the same footing as owner-occupied housing. Since assets are acquired out of after-tax income, capital gains tax is a form of double taxation on saving and serves only to lower the nation’s capital stock, including the stock of houses.
posted on 15 March 2008 by skirchner in Economics
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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 15 March 2008 by skirchner in Economics, Financial Markets
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Stevens on Monetary & Fiscal Policy
RBA Governor Stevens, speaking to Treasury officers Wednesday, remained decidedly agnostic on the appropriate mix of monetary and fiscal policy in controlling inflation:
It strikes me that in the popular discussion about fiscal policy, many participants talk past each other because they are looking at different time dimensions. It is not unreasonable to say that if the budget is perpetually in surplus, there is no debt to speak of and no other looming large unfunded liability, taxes should probably, over some long run horizon, be lower. This, it seems to me, is the economic case for structural reductions in taxes, which some observers articulate. Others argue that such reductions should be delayed, for cyclical reasons, given that demand needs to slow to contain inflation. So there is a structural case for taxes to fall, and a cyclical case for them not to. It is no doubt difficult for any government to reconcile these two, equally valid, points of view, the more so if the same tension persists for a number of consecutive years…
If it is accepted, on the other hand, that inflation is sufficiently general that overall demand has to slow, the amount of slowing has to be the same regardless of whether it comes via monetary policy or fiscal policy. It would be somewhat differently distributed across sectors and regions, as the impact of interest rate and exchange rate effects obviously would not overlap exactly with the tax or spending measures that would occur in their place. I would hazard a guess, though, that a good many people who are today paying higher interest rates would instead pay higher taxes in a world where fiscal policy was used more actively to manage the business cycle.
posted on 14 March 2008 by skirchner in Economics, Financial Markets
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Chinese Inflation
Jonathan Anderson is relaxed about Chinese inflation:
All the evidence suggests that the current spike in prices will prove to be temporary, likely fading away by the second half of 2008, and as it does the prevailing furor over the inflation issue will subside as well…
We agree that money growth is a fundamental force behind inflation in China, and there is a clear and tight correlation between the two over time. But the salient point is that monetary factors drive underlying inflation, and not every short-term twist and turn in CPI along the way. During the deflationary period 1997-2003, the measure of broad money, M2, grew at an average annual rate of 16.4%. What was the comparable pace for the second half of 2007? Around 17.6% year on year—in other words, only slightly higher.
Base money growth has been much lower still, with sharply falling commercial bank excess liquidity ratios in the process. So while it’s easy to argue that money growth may have been nudging core inflation upward, it certainly can’t explain a seven percentage point rise in the headline rate.
posted on 11 March 2008 by skirchner in Economics, Financial Markets
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Peak Oil as Doomsday Cult
Derek Brower, editor of the Petroleum Economist, on peak oil cultism:
Worries about a peak in oil production, however, are not moving the oil markets. I doubt Jeremy Leggett thinks they are, but his article yesterday implicitly linked the peak oil theory with high oil prices. It also claimed that a growing number of oil executives, like Total boss Christophe de Margerie, now support the theory.
Not really. What worries executives like de Margerie isn’t a geological peak. Industry studies show remaining reserves to be literally trillions of barrels greater than the figures offered by the peak oil theorists. They’re worried about getting access to the good stuff. Increasingly, it lies in countries that don’t much like western companies. De Margerie and other executives are simply doing what they always do: putting pressure on producer countries to open up.
posted on 09 March 2008 by skirchner in Economics
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Business Spectator Column
This week’s Business Spectator column (which updates interbank pricing referenced in the previous post). If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 08 March 2008 by skirchner in Economics, Financial Markets
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Rate Cuts by Christmas? Good Luck with That!
If you believe the interbank futures market, then there is a small chance the RBA will be cutting the official cash rate by November this year. This is partly based on the market’s reading of the statement accompanying yesterday’s increase in official interest rates, in which the RBA focused on the expected moderation in domestic demand and inflation. This is simply a reiteration of the RBA’s February SOMP forecasts, but these forecasts look increasingly aspirational.
Today’s December quarter national accounts confirmed headline and non-farm GDP growth were both running above the RBA’s forecasting assumptions. Domestic demand, far from slowing, accelerated over the December quarter to 1.6% q/q and 5.7% y/y in real terms. The first bottom-up estimates for March quarter CPI inflation point to an increase of 1.3% q/q and 4.2% y/y. With a nominal official cash rate of 7.25%, this points to a real cash rate of only 3.05%, although market-determined rates are significantly higher.
This is not the first time this tightening cycle that financial markets have priced in future reductions in interest rates. Markets condition their view in large part on what the RBA says, or more importantly, what it does not say. Yesterday’s statement gave no explicit forward policy guidance, but neither did the February tightening statement. It was not until the February SOMP and Board minutes were released that the RBA bothered to mention its view that further significant increases in official interest rates would be required.
While an easing by Christmas is not impossible, this leaves markets grossly underpricing the risk of further intervening increases in official interest rates.
posted on 05 March 2008 by skirchner in Economics, Financial Markets
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Oil Aplenty: Debunking the Peakniks
Nansen Saleri, former head of reservoir management for Saudi Aramco, debunks the peakniks in the WSJ:
The world is not running out of oil anytime soon. A gradual transitioning on the global scale away from a fossil-based energy system may in fact happen during the 21st century. The root causes, however, will most likely have less to do with lack of supplies and far more with superior alternatives. The overused observation that “the Stone Age did not end due to a lack of stones” may in fact find its match.
The solutions to global energy needs require an intelligent integration of environmental, geopolitical and technical perspectives each with its own subsets of complexity. On one of these—the oil supply component—the news is positive. Sufficient liquid crude supplies do exist to sustain production rates at or near 100 million barrels per day almost to the end of this century.
Technology matters. The benefits of scientific advancement observable in the production of better mobile phones, TVs and life-extending pharmaceuticals will not, somehow, bypass the extraction of usable oil resources.
posted on 04 March 2008 by skirchner in Economics, Financial Markets
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