Well, well, well...You would have read about it here first. The rapidly growing snowball that is the evidence questioning both the RBA's commercial and political independence, and validating my concerns about conflicts on the RBA's Board that undermine its ability to discharge its inflation-targeting responsibilities, continues to build.
Yesterday the Australian Financial Review screamed out, "Conflict call on Reserve Bank Board", which rehashed a story published a few days prior in The Australian. The latter broke the news of "Labor's great financial crisis split with RBA" via Wikileaks cable disclosures of a biff between the incumbent Labor Government, led by Kevin Rudd at the time (will he get another go?), and the RBA in respect of monetary policy decisions during the GFC. The Australian reports:
"The cable shows the government considered outspoken Reserve Bank board member Warwick McKibbin as a stumbling block to its aggressive approach because of his conviction - ultimately vindicated - that China would recover in time to save Australia from recession."
The Australian sensationally revealed that the Prime Minister's advisors were critical of the RBA's decision-making in discussions with senior US Government officials, as relayed in their written cables back to Washington (see also my comments on this at the end of the post):
"[T]hen prime minister Kevin Rudd's chief macroeconomic adviser Steven Kennedy told the US embassy that he and his Treasury colleagues had become "increasingly frustrated" with the Reserve Bank's decision to pause its cuts to interest rates at a time when the economy risked recession. "He complained that the RBA is 'schizophrenic' in that the bank simultaneously believes that Australia will be hit hard but that it should hold off on further rate cuts in order to 'keep its powder dry' in case things get worse," the cable reported. Mr Kennedy suggested that Reserve Bank deputy governor Ric Battellino and others on the board...had been swayed by Professor McKibbin's argument that Australia was likely to be spared the worst of the global economic downturn by a recovery in China in the second half of 2009. "Kennedy argued that McKibbin could be right, but that the preponderance of evidence is that the current downturn will be much worse," the cable said. "(Mr Kennedy) stressed that the PM would much prefer the Bank and the government to have to take rapid action to compensate for doing to (sic) much than take corrective action after doing too little," it said. The Reserve Bank ultimately cut rates one more time - by 0.25 percentage points on April 8..."That's why you want the Reserve Bank to be independent from both Treasury and government," Professor McKibbin said. "It would have been good if the government had listened to my advice on fiscal policy at the time. We wouldn't be facing what we do now, which is an exacerbation of the two-speed economy."Right now we should be running surpluses and extracting demand from the economy to reduce pressures on the non-mining sectors.""
The Australian Financial Review subsequently reported that after 10 years on the RBA Board, McKibbin has concluded that the Treasury Secretary's presence is undermining the political independence of Australia's central bank. This had, in fact, been previously reported in an exclusive published by Michael Stutchbury in The Australian a couple of weeks ago under the headline, "Business has too much say at the RBA", which is actually a subject that Stutchbury and Paul Kelly had interviewed me about on Sky News' Australian Agenda TV show about a week prior:
"OUTGOING Reserve Bank board member Warwick McKibbin has called for an end to the majority of business leaders on the central bank board because they might not be tough enough on inflation...Professor McKibbin says the board's structure should be rebalanced to three Reserve Bank staff, three academic economists or external experts and three business people...Professor McKibbin favours excluding the Treasury secretary, whose board membership is often justified as helping co-ordinate budget policy and monetary policy. "What if you have got a very political Treasury secretary who is concerned about the government of the day, which could be against good policy?" Professor McKibbin asked"
The Australian Financial Review caught up with this news yesterday, and also reported on the question of whether McKibbin's removal from the RBA Board, which I had actively campaigned against, was politically motivated:
"Former Reserve Bank of Australia board member Warwick McKibbin wants the position of the secretary of Treasury on the bank board to be scrapped following revelations that confidential deliberations were disclosed to government and US embassy officials two years ago. McKibbin says a US embassy cable sent in April 2009 disclosing RBA board debates makes it “pretty clear” there had been a breach of the board’s confidentiality. He says the revelations, which suggested there was increasing frustration in the government and Treasury with the RBA’s cautious approach to rate cuts from April 2009, help explain why his board membership wasn’t renewed this year. “It explains why the government of the day was very keen for me not to be reappointed, which I was disappointed about.” He says the incident highlights his concerns that the Treasury secretary faces a conflict of interest between their role as adviser to the government and as a board member. “There is no reason the secretary of the Treasury should be on the board,” he says. He believes the board should comprise three senior RBA officials, three community and business representatives and three experts."
I had heard mumblings of the Rudd-RBA GFC split before. In particular, there had been talk (and perhaps reports) of a disconnect between Warwick McKibbin and the RBA officials, on the one hand, and the Treasury Secretary, Ken Henry, and the Board 'doves' (numbering three at this time), on the other in or around mid to late 2008. More specifically, the Prime Minister's economic advisors, Andrew Charlton and Steve Kennedy, with some background prodding from US academic Joe Stiglitz, were convinced Australia needed the mother-of-all-fiscal stimuluses to avoid a 1930s style depression. Treasury must have been sympathetic to this line of reasoning, because there has been talk that Treasury's (and the Government's) representative on the RBA Board had pushed for a near-zero cash rate. McKibbin and the RBA purportedly resisted this on the basis that Australia would weather the storm better than the Government thought. This is also why McKibbin railed against the size of the fiscal stimulus. In principle, the RBA could have cut rates further if the stimulus had been smaller, which might in turn have allowed the government to return to surplus more rapidly than has been the case (with 2013-14 now looking like a stretch).
The bottom-line: The growing perception is that the RBA and its relations with Government and the doves on its Board are in disarray, as I intimated some time ago.
