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, June 14, 2011

Are consumers getting too much financial information?

In today's AFR Ian MacFarlane, the former Governor of the RBA, makes some sound points--I've made similar observations--regarding the velocity and volume of information we receive in today's web-enabled world, much of which is a waste of bytes (esp. in regard to daily share price movements, which are largely noise).

Yet I think he is totally misplaced in relation to his central case that RBA interest rate decisions receive far too much attention in Australia. Glenn Stevens made the same argument some time ago. In support of his claims, MacFarlane references an internal RBA study that sought to quantify this "media bias" by comparing the number of news articles that followed interest rate decisions announced by the RBA, and the Federal Reserve and Bank of England in the US and UK, respectively.

However, as I have explained before, this experimental design is completely flawed, and there are very good reasons why the RBA's decisions receive far greater media coverage than its US and UK counterparts.

And that is because unlike the US, where almost all home loans are fixed-rate, and the UK, where 50-60% of loans have traditionally been fixed-rate, around 90% of all Australian mortgages are variable rate (and thus priced off the RBA's cash rate). Put differently, less than 10% of all Aussie households have fixed-rate debt.

This means that changes in the central bank's cash rate have dramatically more important and widespread consequences for borrowers in Australia relative to the US (particularly) and the UK.

Ironically, this is a point that the RBA itself belaboured during the GFC (ie, the fact that cuts to the cash rate had immediate pass-through effects to borrowers, which was not the case in the US and UK).

You could also make the argument that Australia's unique superannuation system, which furnishes households with exposures to many different asset-classes, boosts consumer interest in more timely and diverse financial information.