Late last year on SBS News, when Stan Grant asked me which way the RBA would move rates in 2008, I replied “Up, and then down”, Stan quipped “Spoken like a true economist–an even handed answer!”–to which I replied “More down than up”.
I expected the intial rate rises because of the RBA’s focus on the rate of inflation, and a subsequent fall, not because inflation would be heading down, but because the economy would be–and the RBA rate would be forced to follow it
Last month closed with some far from comforting news about the state of the US housing market (sales and prices still falling), US financial institutions (Fannie Mae and Freddie Mac in need of rescue), Australian banks (NAB’s 90% write-down of its US CDO portfolio). Then ABS figures showed that retail sales had fallen “unexpectedly” by one percent in June. The recent rally in stock markets came to a sudden end, and after a brief period of renewed confidence, the question “how much worse can “It” get?” is once again doing the rounds.
My answer is: a lot worse. The empirical grounds for this assessment are:
Senator Nick Sherry, as Minister for Superannuation and Corporate Law, has released a Green Paper Financial Services and Credit Reform: Improving, Simplifying and Standardising Financial Services and Credit Regulation (June 2008)
This is a very apt time for such an enquiry. It is now over a decade since the Wallis Committee supported further deregulation of the financial system, and the consequences of that deregulation are now evident. I doubt that a complete reversal of policy is politically feasible now, but this inquiry may set the high water mark in the belief that the less regulated financial markets are, the better.
I recently made a submission to the Senate Economics Committee on the RBA (Enhanced Independence) Bill, where I argued against the Bill–as did all four public submissions.
After making that submission (which I’ll post here shortly) I thought I’d check out my submission to the Wallis Committee–since I argued that the RBA and the regulatory authorities in general, while they may appear to have succeeded in controlling inflation, have presided over the biggest speculative bubble in world history.
The securitisation of loans was a major part of this bubble, which of course, no-one could have foreseen… or at least that’s the line from conventional economists.
As a 65 year old winner of the Nobel Prize in Economics, Joseph Stiglitz is not someone that mainstream economists can dismiss as either a crank or senile–the usual reactions to anyone who opposes conventional thought in economic theory or policy.
So when he comes out and says that inflation targetting is foolish and dangerous, his views are worth taking note of. Here is Stiglitz’s commentary on inflation targetting, published earlier this month.
RBA Assistant Governor Guy Debelle and I spoke at a conference on Subprimes in Adelaide last month. One aspect of my analysis that Guy queried was my emphasis upon the Debt to GDP ratio. He noted that this appeared suspect, because it was comparing a stock (the outstanding level of debt) to a flow (annual GDP).
It’s a valid point to make. The engineer-turned-economist Mickal Kalecki once caustically observed that “economics is the science of confusing stocks with flows”, and I’m a stickler myself for not making that mistake. So making a song and dance about a stock to flow comparison like debt to GDP has to be justified by a sound argument.
Nouriel Roubini is one of the world’s foremost experts on the financial system, and like me, was warning of potential crises while most other commentators could only see roses blooming. He is Professor of Economics at New York University’s Stern School of Business, and founded the RGE Monitor, a highly successful commercial intelligence website. He has recently established a new blog with a focus on Asia, and has kindly asked me to be one of the contributors.
Normally I will simply cross-post my Debtwatch blog, but on occasions I’ll write special purpose entries there. Nouriel has also assembled an interesting team of non-orthodox commentators from the academic and business sectors.
The Reserve Bank Amendment (Enhanced Independence) Bill 2008, which was tabled in Parliament in March, aims to give the RBA Governor and Deputy Governor “the same level of statutory independence as the Commissioner of Taxation and the Australian Statistician” (Wayne Swann, Hansard, Thursday, 20 March 2008, p. 2381).
Under the current Reserve Bank Act, the Governor and Deputy are appointed by the Treasurer, and the Treasurer must remove them from their positions if either of them:
Section One on ” The future of the Australian economy” starts with the following preamble:
“The Australian Government is committed to modernising our economy so that we can compete with the leading nations in a world economy that is being transformed by globalisation, new technologies, and the rise of China and India. While we take full advantage of the mining boom, we must also build long term competitive strengths in the global industries of tomorrow — industries that will provide the high-paying jobs of the future.
The Australia 2020 Summit will examine:
This blog entry first appeared as a feature in the Daily Telegraph on Wednesday April 9th 2008. If you’re a newcomer to it courtesy of that feature, and you want to look at this issue in more depth, there are links below to more detailed analysis.
The Daily Telegraph lived up to its nickname of “The Daily Terror” last week, with a frontpage attack on Reserve Bank of Australia Governor Glenn Stevens entitled “Is he Australia’s most useless?”, and an editorial that was no less provocative: “RBA boss is losing interest”.
