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."

Saturday, April 21, 2012

Terry McCrann and the inexorable undermining of the RBA...

Terry does a good job defending the RBA's long-standing commitment to inflation-targeting, which, as I have predicted for years, is now being publicly challenged by vested interests, in an opinion piece for The Australian here.

He covers important historical territory, much of which I have surveyed myself in past columns. He nevertheless omits the interesting link between Garry Weaven, who he attacks, and industry fund patriarch Bernie Fraser--they are close and effectively control the union-founded Members Equity Bank as director and chairman, respectively. (Disclosure: I deal with ME Bank, which has a terrific CEO in Jamie McPhee, and know both individuals personally.)

And while it is absolutely correct that Bernie was the first RBA governor to informally embrace inflation targeting in the early 1990s, he has said he conflicted at the time with the RBA staff (Bernie was a softer Treasury man) and the likes of future Governor, Ian Macfarlane, over the policy weight the RBA wanted then--and subsequently through the "statements" that were first initiated in 1996--to give to its inflation target.

Bernie is a genuine fan of the dual mandate, and is one of the few Australians who can debate it intelligently (you could Andrew Leigh MP to that select bunch). He has also been a commendable defender of the importance of an independent and empowered RBA board. Again, I've covered all of this in considerable detail in years past, and have recorded on the record all of the relevant quotes from Fraser himself.

But let there be no doubt: this RBA is privately worried about its political independence, and the public durability of its inflation-targeting framework. I will repeat what I said a few weeks ago in anticipation of the pressure being applied to the bank now: after 20 plus years of relentless economic growth, entire generations of Australians have forgotten why the RBA went to such great lengths to prioritise the primacy of "price stability". They have forgotten that the average home loan rate between 1980 and 1995 was about 12.6 per cent. They have forgotten that you can have high inflation coincide with high unemployment, as we had during the 1970s.

Over to McCrann:

In the 21st century, the "them" to now target are central banks around the world. The money they have up for grabs dwarfs that of Sutton's or indeed any era of commercial banking. And talk about a world turned upside down -- the modern Suttons are the commercial banks themselves.

Well, at least they are in the US and Europe, where the quaintly titled Quantitative Easing figuratively shovels the cash out to the banks.

A modern ECB or US Fed doesn't even put those banks to the indignity of having to come get the money; a keystroke on a computer will do the job, transferring hundreds of millions of very real dollars in instantaneous virtual reality cyberspace. The "where the money is" focus down under has taken a different path. It's the growing chorus for the RBA to put money in pockets via interest rate cuts.

Former union leader and subsequent superannuation and wind energy entrepreneur and main-chancer Garry Weaven accused the RBA of being too focused on inflation. The inflation targeting mandate imposed when Peter Costello was treasurer in 1996 was now "totally inappropriate", Weaven said.

He went on to claim that the RBA had far too much focus on inflation only and "not enough on full employment and economic prosperity generally, which is their requirement under the (RBA) Act".

These sentences from Weaven were riddled with inanities.

The inflation mandate was not "imposed" in 1996; it was agreed between the government and the then incoming governor of the RBA, Ian Macfarlane, as part of a wider statement of the respective roles and responsibilities of the RBA and the government.

Indeed, it formalised a broad inflation targeting regime which Macfarlane's predecessor Bernie Fraser had already informally and unilaterally adopted.

Fraser was the first -- and so far, only -- governor appointed from outside the RBA. He'd been very precisely hand-picked in 1989 by then-treasurer Paul Keating, whose Treasury head he had been.

Both at Treasury and in his early days at the RBA, Fraser had been a supporter of the Hawke-Keating core Prices and Incomes Accord -- as governor he was prepared to make the RBA a supportive partner of the Accord.

But he would be mugged by reality. In at least his last two years as governor he promoted a more conventional, more independent RBA policy dynamic, built around a focus on maintaining the "stability of the currency".

Why? Because, broadly, he came to fully recognise that sustainably low inflation is the absolute precondition to achieving any success on the two other objectives mandated for the RBA and referenced by an unknowing Weaven. Just like his (much) younger and even less knowing colleague Paul Howes the week before.

It's not simply that Fraser and his successor governors and their boards are seeking to achieve precisely what people like Weaven and Howes -- and indeed, many in the business community who, like former PM John Howard, have never seen an interest rate increase they didn't intuitively and ignorantly dislike -- accuse them of ignoring.

But it is the only way to achieve all three things mandated by the RBA. And that further, doing what people like Howes and Weaven propose is the precise path to destroying jobs and prosperity. Further, it's just not accurate that the RBA "only" targets inflation: it monitors and modifies what it does, very mindful of jobs, investment and everything else.

Set against these inanities, that of the prime minister was almost incidental. Her suggestion that a budget would "enable" the RBA to cut interest rates. Or should that "enable" be read as "demand"?

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