Well the Deputy Chair of the House of Representatives Economics Committee, Jamie Briggs, did not disappoint us in going toe-to-toe with the Governor of the RBA during today’s lively testimony.
Amid all the usual political gasbagging, Briggs discarded his partisanship and focussed on the real governance issues that the Committee is meant to examine: is the RBA serving taxpayers to the best of its ability (which it ordinarily does); can we make any improvements to that way in which it works; and have all prospective governance risks, irrespective of how low they may be, been appropriately minimised?
Briggs did not pull his punches in lobbing controversial questions at the Governor on the Board leaks affair, which the ABC covered here, the very interesting matter of whether the RBA would have to rewrite its agreement with the Government in order to ‘lean on asset prices’ (the Governor was visibly very awkward when challenged with this)—and let’s be clear, whether you are ‘leaning’ on asset prices or ‘targeting’ them is a false dichotomy (nobody seriously believes the RBA would explicitly target an asset price ‘level’), and, finally, on the question of the expertise of the RBA’s Board in an increasingly complex monetary policy setting world. Again, on this latter matter, one could sense that the Governor felt the conversation was heading towards rather hazardous territory. Yet I was also impressed by the relatively balanced manner in which he dealt with Briggs’ hand-grenade.
There is no doubt that Briggs is right in echoing Professor Adrian Pagan’s advice: the five lay business leaders that sit on the Board cannot realistically do the job they were appointed to fulfil; ie, critically evaluate the RBA’s monetary policy recommendations. They simply don’t have the necessary technical expertise. And the argument that they give the Governor access to unique insights is a furphy—Glenn can speak with any CEO in the country whenever he pleases. The fact is that their presence actually undermines the already minimalistic governance protections that have been put in place.
Briggs appropriately refrained from drawing any hard-hitting conclusions on the day. He did the right thing, however, by laying the issues on the table. There was one curiosity: I was surprised by the vehemence with which the RBA denied that it had ever leaked its Board recommendations to favoured journalists: the financial markets believe they have; all the economists accept the practice; former officers have acknowledged that it occurs; and the empirical record clearly shows that Ross Gittins, Alan Mitchell and Terry McCrann have Nostradamus-like abilities to predict the outcome of Board meetings when nobody else comes close. Including the last one, where McCrann was the only person on planet earth who forecast a pause.
I will leave you with my record of the exchange.
BRIGGS:
“Just on a slightly different track: On 2 November last year there was an article on the Lateline Business program about suggestions that the Reserve Bank executive selectively leaks the likely outcome of the board meeting prior to the board meeting. I guess the presenter summarised it best: Certainly, there’s disquiet among market economists that the Reserve Bank is selectively briefing certain journalists in the lead-up to rate decisions. Many argue the practice undermines the board process. I am just interested: did you see the report, and do you have a comment?”
STEVENS:
“I did see the report. Apparently there were not too many selective leaks in February, because everybody was surprised, so I am not sure what to make of all this.”
BRIGGS:
“So, you…”
STEVENS:
"No, people do not leak the outcome. For a start, the staff do not take calls from the media after the relevant internal meetings where we have come to the view of what we are going to recommend. That is usually on the Thursday morning; the papers go that night. Secondly, we cannot be certain that the board will do what we recommend. It is a board of nine people, and I can assure you they are all of independent mind. People do not leak that information; in my experience the Reserve Bank never has leaked and, if I can help it, it never will.”
BRIGGS:
“I presume you looked internally after the program to assure yourself that…”
STEVENS:
“I am quite confident that the processes we have are quite robust.”
BRIGGS:
“On the 1996 statement which gives you your independence, I noticed in Paul Kelly’s book there was a reference on page 117 to in 1994 the then Prime Minister influencing a decision of the bank, which of course does not happen anymore, post the 1996 statement. Would you consider that that statement would need to be altered with the government if you wanted to change the way or increase the focus you put on these issues?”
STEVENS:
“I am not writing to the Treasurer saying, ‘We’ve got to reword this thing.’ I do not really feel exercised about that. These things will be rethought next time there is a new government or a new governor and it will be for those people at the time to decide whether there are some words about this. I do not feel, myself, that we need a wholesale rewrite of that at all. We are on the third version of that statement now: last issued in 2007. It is in operation for the term of this government or my term, whichever ends first. It has been going for more than a decade. The inflation targeting framework itself has been going for 16 years. I think this system is working pretty well. In my view we do not need any kind of major surgery here. What we should always be doing is watching the evolution of knowledge and experience and integrating that into the way we conduct ourselves within the framework, but I think the framework gives us adequate scope to do that.”
BRIGGS:
“We have been talking about lessons from the crisis and lessons going forward. I am interested in your thoughts on a potential issue which is still to be debated. You commented about the increasingly complex environment you are operating in when setting monetary policy. You said it is more difficult now than in the past because of the interconnections globally and so forth. You also commented in the February 2009 publication that your independence comes with accountability and a higher requirement for transparency in the form of published reports and analysis, open parliamentary scrutiny, publication of minutes and so on. Do you think it is time to look at the make-up of your board? Given the complex nature of the environment you are operating in, do you see a need, as Professor Adrian Pagan has argued, to have more expertise on the board? It is good to have business leaders on the board, but I am sure you engage regularly with business leaders and get that advice from them. Do you think it would be useful, given the independent operations of the bank…”
STEVENS:
“I am a bit reluctant to open up that line of discussion very much. It is not my prerogative to set the structure of the board. There is an interesting history here. In 1945, when the central bank was the Commonwealth Bank, the board was actually abolished. The same legislation that gave us the charter that we still have also abolished the board and in effect left all the power in the hands of the governor. The board was then reconstituted in 1951. The board we have now is the same board. We have the same mix of internal and external members: the Secretary of the Treasury is a member: and we have a governor, a chairman and so on. So we have had this sort of a board for almost 60 years. I know that Adrian made those remarks, but, on the other hand, one would have to say a couple of other things. Firstly, I would say that in recent years, if we judged by the results, this structure seems to have been working pretty well. The other thing…”
BRIGGS:
“But the environment is changing. You have commented that the environment is changing.”
STEVENS:
“Yes. The other thing I would say is that in Australian society, at least hitherto, having a board made up of men and women from commerce and academia and the general community: not just officials and monetary experts: has probably given us more legitimacy with the average man and woman in the street than we might otherwise have had. And that is an important thing to have. That does not mean it is necessarily ideal forever. I am the chairman of this board: and I defend it and think it works well: so it is very hard for me to engage in speculation about what might be better. It is certainly a unique board among the central banks of the developed countries: I cannot think of any others that have our structure, other than the ones who have copied it from us, and there are few in our neighbourhood that have: but it has worked.”
