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, July 14, 2012

The RBA's other job: bailing out insolvent banks

I've written about this a lot in the past, and criticised the RBA for trying to create an artificial distinction between illiquidity and insolvency (a mistake many central bankers make), which does not exist under the law. The RBA Deputy Governor returned to the subject last week. The RBA's new "committed liquidity facility" is basically a taxpayer line of credit that prospectively (or counterfactually) insolvent banks can draw on to get immediate cash when they cannot meet their liabilities because of the underlying illiquidity of their assets. Dr Lowe describes it as thus (my emphasis added):

And I think kind of from a high level public policy point of view it’s entirely appropriate for the central bank to offer this type of facility to promise to liquefy certain securities in a stress environment. That’s what central banks are supposed to do. It’s also appropriate for the banks to pay a small fee – a small standing fee for doing that because if they were to hold government securities on their balance sheet rather than private sector securities they would earn a lower rate of return. So they’re earning a higher rate of return because the government securities on issue are not there, and part of that extra higher rate of return is reflected in this fee that is paid to the Reserve Bank. So I think that set of arrangements is perfectly consistent with what an appropriate policy for a central bank is and it should not lead to stresses in the government securities market.