The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Tuesday, October 12, 2010

Dr Stephen Grenville on, well, everything...

Dr Stephen Grenville, who is currently a visiting fellow at the Lowy Institute, and was previously the long-standing Deputy Governor of the RBA, has written some outstanding articles/papers over the last year or two on everything related to the GFC. You can get his article list here. A few highlights include:

*Grenville arguing against ‘free market exchange rates’, which one might think odd coming from a conservative Western central banker (but it gives you an insight into how the RBA thinks about exchange rate management);

*Here he argues that US Fed-style 'quantitative easing' (QE) will have a limited impact, and the notion of a pure 'helicopter drop' (ie, printing money and supplying it as a cash gift rather than buying assets such as govt bonds) should be left to the Treasury;

*In this refreshing article, Grenville rails against US rhetoric regarding Chinese currency manipulation, and makes the case for a slow adjustment of the Yuan;

*Here he echoes, in an erudite fashion, a lot of the points I have made about the banking system with respect to its utility characteristics, and the new policies required in a post-GFC world (see, for example, here);

*And, finally, in this longer paper, Grenville effectively rejects the 'leaning against the wind' arguments about which I have written extensively (see, more recently, here and here). He seems to fall into the Debelle/Gruen/Joye (mk I)/Kirchner (to a lesser extent) camp. He believes that there should be a policy response to asset price bubbles that have the potential to unwind and damage the real economy, but that interest rates are unlikely to be suitable. For the historical record, I have excised his arguments on this front at length below:

"Supposing a bubble can be identified and seems potentially quite harmful, what then? If interest rates are already set appropriately to support the strongest level of activity consistent with the CPI inflation target, then to tighten policy to address pressure on asset prices will clearly have some cost in terms of forgone output. At the same time, a minor tweak of interest rates is unlikely to do much to slow down an asset price bubble, where prices will be rising much faster than the nominal interest setting. There is probably enough flexibility or ambiguity in the policy setting to lean against an exuberant asset market which, while not immediately inflationary, will cause some pressures later on. That said, the choice of “lean or clean” (White, 2009) is intrinsically unsatisfactory: ‘leaning’ is unlikely to constrain an asset bubble and ‘cleaning’ is messy. The better answer is to look for additional instruments to restrain asset prices, in the form of micro instruments such as capital ratios, loan to valuation ratios (LVRs) or even credit growth limits (Posen, 2009). A capital gains tax is another possibility. Where these micro instruments have been given to a separate prudential supervisory authority, this authority must be explicitly given the task of using these instruments to restrain asset prices, or (a better option) be required to take instructions from the central bank (which has more knowledge of the macro environment to be able to judge the needs).

Just as the IT framework has evolved from the original narrow version, monetary policy is evolving to accept some responsibility to constrain asset bubbles. A number of countries have already used additional instruments –Singapore, Korea, Taipei China and China have all recently responded to the need to restrain property purchases. The old one goal one instrument world is evolving into something more complex and nuanced and this is to be applauded."