As we await another punitive rate hike from the Reserve Bank, thoughts turn toward the much-mooted review of the RBA being prepared by the government.
Until recently, the case for a review was dubious at best. Unusually, the bipartisan nature of calls for a review was evidence that something suspect was going on: all sides were bringing their baggage and political grievances to the table.
The review — which began life as an idea from Labor and the Organisation for Economic Co-operation and Development (OECD) and later was adopted by then treasurer Josh Frydenberg — would have allowed Labor to go after the bank for holding interest rates too high before the pandemic, allowed right-wing economists to go after it for holding rates too low and to try to get rid of full employment from the Bank’s mandate, and allowed a Coalition government to go after governor Philip Lowe for his now-abandoned advocacy for more stimulus and higher wages.
Something for everyone, as we noted last year.
Much of this thinking reflects a mindset among politicians that monetary policy can safely be blamed for any number of economic sins. In a seminar organised by the Reserve Bank last month on the “Causes, Challenges and Consequences of a Low Interest Rate Environment”, one paper from Professor Eric Leaper of the University of Virginia referred to the “hype”, which he argued was about “blame-shifting … elected officials’ desire for blame-shifting is insatiable”.
Leaper suggested that independent monetary policy was really “a gift from elected officials to themselves: whipping boy when economy turns sour”, a situation reinforced by economists, policymakers and the media. One of the consequences is a lack of appreciation for the role fiscal policy plays in inflation. “Let’s take fiscal policy seriously,” Leaper suggests. Is a review up to that challenge?
Recently the issue of board composition has also been thrown on the table — and everyone is bringing their ideological baggage to that too. The Australian Council of Trade Unions (ACTU) wants someone from, well, the ACTU on the board. The neoliberal hacks of The Australian Financial Review are warning against “politically correct” appointees to the board (as if stuffing the board full of business executives isn’t simply another form of political correctness masquerading as “the best people for the job”). Academic economists would like — brace yourself — an academic economist on the board.
This may be the high temple of economic policymaking, but, to invoke a biblical analogy, there are plenty of moneychangers looking to get in there.
But Philip Lowe and the RBA board have seemingly set out to bolster the case for a thoroughgoing review of the conduct of monetary policy. With the bank’s colossal backflip on interest rates and wages growth, the bank has doubled down on the case for a review on all sides. Was it too soft on inflation before it began raising rates? Is it being too aggressive in lifting rates now? What about the poor households foolish enough to actually believe Lowe and the board in their persistent statements that rates wouldn’t rise until 2024? What about new homeowners looking at double-digit declines in the percentage value of their major asset as a consequence of rate hikes? Oh, and what happens if the bank engineers a recession?
Then there’s the bank’s messaging. Is a double backflip with a 7.30 interview twist enough?
Bank supporters will argue, with some truth, that much of this is down to the extraordinary effectiveness of the RBA’s response to the pandemic, which has left us in a much better economic situation than many — most — feared in the dark days of 2020. Inflation is a much nicer problem to have than a lingering 1990s-style recession. But there’s not likely to be too many working households across the country inclined to see the upside of surging bills and mortgage repayments.
And one of the biggest single sources of those surging bills is the energy sector, which is in the middle of a historic collision between geopolitical forces and the laws of physics. We need to engineer a rapid transition away from fossil fuels and fully electrify our energy systems. The costs of that transition will be substantial and decades-long.
Will the RBA continue to see the costs of decarbonisation as an inflationary distortion that requires higher interest rates? Or should its mandate extend to include supporting rapid decarbonisation, given the profound impacts of climate change on the economy and thus on monetary policy?
The neoliberal purists are already blanching at the thought — in their view, the only mandate the RBA should have is to grind inflation into the dirt at every opportunity. Everything else is left-wing mumbo-jumbo.
But if they want a review of the RBA, and its mandate, then everything should be on the table.
What about just raising taxes on business to recover some benefit for citizens for the decade of inflated profit at the expense of wages growth? Screwing around with the RBA charter and board composition won’t do that. Government can and must do that starting with a windfall profit tax on the thieves in the fossil fuel caper.
Bit annoyed that the RBA is the whipping boy here. If at anytime in the last 10 years various LNP govts had done a bit of fiscal policy instead of fixating on the “back in black” delerium the RBA would not have had to reduce rates so low. The enemy here is Howard, Abbott, Morrison snd associated Treasurers. Turds the lot.
If the Reserve Bank had had a separate lever to control housing prices, the housing bubble would not have become so dangerously over-inflated. Let’s not sympathise with property speculators complaining that their gambles have not paid off. It is they who have wrangled rorts and tax dodges from successive governments, which would not have happened if it was the RBA pulling the levers.
Decarbonisation will require a body with the independence of the RBA, surviving successive governments. Their first levers would be to permit or deny applications to continue extracting fossil fuels.
The tax policies of Morrison and Howard caused speculation and huge growth in housing prices. Enormous mortgages crimp spending. Why favour housing over investment in company shares and infrastructure?
the house price thing started in the late 80s early 90s
we used to have a limited amount available for houses before BOB Hawke . Thats the truth not the politics of it.
The RBA does, in fact, have a separate lever for influencing mortgage lending, several of them: prudential regulations – the kind of thing that determines deposit requirements, default risk assessments, and so forth. They even have parallel sets of levers for various different kinds of bank lending – owner-occupier, investment, business lending, and so forth. I’m pretty sure they have some levels of control over credit cards and the like, but they’re a very different kind of credit so the regulations are going to be very different.
These regulations are actually a far better and more fine-grained tool for managing housing prices than interest rates, because they /directly/ target particular sectors, and can properly differentiate between various different parts of the housing market. If you need a 25% cash deposit to get a loan for an investment property that’s going to have a big impact on how much people are able to leverage their investments; if you can’t borrow more than five times your annual income regardless of how wonderful the location that’s going to put a big dent in the drive for higher house prices.
The RBA has even been /using/ these regulations, at least a bit. They haven’t been willing to push very hard on them, though, for some reason – probably an ideological attachment to the idea that interest rates are /the/ mechanism for managing things.
So the RBA does have separate levers to control housing prices! Our commentators should be watching for movements, or lack of movements of these levers. Currently, they could be pointing fingers at the RBA for their failure to control the recent blowout in housing prices and risky mortgages.
People arguing against funding a move to renewables (transmission costs, etc) are yet to tell us what we spend every year on fossil fuels to power our homes, and once we’ve done that, power is free (and therefore the rent seekers are out of work)
The Coalition squandered fifteen years with its hostility to renewables and totally failed on a transition to renewables.
Looks like we are on a path similar to the Fraser/Howard recession of the early 1980’s. Have we learned nothing?