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."
Sunday, August 26, 2012
Governor Stevens on our "national tendency to fret about bad news"
On the community's reluctance to objectively parse data:
Mr Stevens: [E]ven apart from our national tendency to want to seek the bad news and fret about it...I think there is the tendency we all have to focus on anecdotes, but we also have to come back to trying to measure as systematically as we can the big picture, as well. We do not ignore anecdotes, and we do a lot of liaison, but we also have to try to fit that into a systematic assessment of the bigger picture...I have begun to wonder whether we in Australia worry about the Greek economy more than the Greeks do, almost...It would not be any secret to the committee that I have tried to get people to see half full rather than half empty because I think we risk talking ourselves into more gloom than we really should. At times like this, it is part of my role to try to give a balanced picture. Cautiously optimistic, I would describe myself as, but cognisant that there are many hurdles for the world economy in particular to get over in the period ahead.
On Australia's economic schizophrenia:
Mr Stevens: When I have tried to address the question: is it all luck? It is certainly not something that we created ourselves to be geographically where we are with the resource endowment we have but that is a blessing that has come to us. I think you could express it in the way you did between a deflationary risk at least in one place and extraordinary growth at all times until recently actually inflationary risk in the other. We are in the real economy exposed to the strong bit, and our financial economy and our psychology is still quite connected as well to the pessimism from the North Atlantic.
On house prices, stress tests, and the banking system:
Mr Stevens: People worry about house prices. This is a common question that comes up, particularly from overseas observers. I have spoken about that recently. One really never knows. At this point, house prices, relative to income, are at a ratio of four or so, which is much higher than it once was, but it had been there for about 10 years. The household sector is actually managing its debt and paying it quite well. I think we are in reasonable shape there. Those issues are routinely stress tested by APRA—what happens to bank balance sheets if something happens. Scenarios that are often gone through there involve a recession, a big downturn in house prices, unemployment goes up et cetera. The system gets affected but it remains well and truly solvent. So, yes, bad things can happen, and you are never going to know for certain how you will go if they do, but I do not see that we should not at least have some quiet confidence that we will manage. That is my view.
On the value of Australian contingent liabilities:
Dr Lowe: If you add up the contingent liabilities from the financial claims scheme, the wholesale funding scheme and the state government guarantee scheme, you would get a number that is close to $980 billion, which is the equivalent of about 75 per cent of GDP.
On whether the government should charge for the deposit guarantees:
Mr Stevens: If the argument is that there should be a charge for the deposit guarantee, I personally am not averse to that idea. That is not what was decided. Some countries do and some do not.
On why the economy is in pretty good shape:
Mr Stevens: My thumbnail answer to that would be that, at present, on the data we have, we have an unemployment rate of a bit over five per cent; core inflation is two per cent; our government is AAA rated—that is a smaller and smaller set of governments in the world today—our banks are strong; and we have been given, by the global economy, a huge gift, really, by the terms of trade rise. In the history of the Australian economy, in the time I have been working as an economist, that is a pretty good set of outcomes by the standards of that history, I must say. That is not to say we should not try to do even better, but, objectively, on a historical reading, you would have to say that is a very respectable position.
On why all roads could lead to inflation:
Mr Stevens: In anything approaching normal times, for the central bank to be contemplating large-scale purchases of government debt in the market and so on, and putting the amount of liquidity into the system that they already have—let alone what they do in the future—every textbook I ever read said that in the long run and even in the not-so-long run that would be inflationary.
On whether the Aussie dollar is over-valued:
Mr Stevens: I guess what I would say is that the fact that it is high does not mean on its face mean that you can say, 'That must be a distortion.' It could be, but let us put it this way: in the internal work that I have asked the staff for, I say: 'We have had various comradeship relationships over the years. How does what is in the market now compare with what would be predicted?' For some of those it is higher than would be predicted. There are one or two models you can come up with that say it is quite undervalued. I personally would not draw that conclusion but, as with any model, you can find various answers. I think it is probably the case that on balance it looks high relative to the mean prediction of models, though the size of that gap is not especially large in comparison to other forecasting errors or 'misalignments' we have seen in the past. So it is a bit on the high side, I would say, but probably not dramatically so...
I would describe it as probably at present trading a bit above where I would have thought it would be, based on these past relationships and my instinct of the sorts of things that have been happening in, say, the past six months—terms of trade have declined, global growth outlook is not catastrophically bad but it is softer than it was and so on. I am probably, to be honest, a little surprised that it is not a little bit lower than it is. But we are not talking 20c worth or something—I do not want to give figures. I would say it is probably a little on the high side, but in terms of the statistical relationships you can fit you cannot actually say that error is all that significant. It is just my instinct that suggests that it is a bit on the high side