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, August 4, 2012

On Gideon Haigh's RBA feature...

Listen, I know I have already posted about this below, but let me expand on the observation. As a literary effort, I think that Gideon Haigh's feature in the AFR today is the best I've read on the RBA. Gideon came and spoke to me about the Bank, and we ended up chatting for a couple of hours. A handful of my own comments probably got projected in the text. It is truly a delight to read Gideon, and he has quickly navigated some very rugged terrain. And I think he has more to substantively contribute on the subject. Gideon's feature today was by design historically orientated. He only briefly touched on the contemporary debates. One of the four biggest media brains in the game--Michael Stutchbury, Chris Mitchell, Alan Kohler or Mark Scott--should, I would humbly suggest, commission Gideon to more exhaustively parse these issues. It is undoubtedly in the community's interest. I've raised most of the following questions with Gideon before, but I will sketch them out again to remove any doubt (in no particular order of priority):

1. Does the complexion of the RBA board, and the appointment process, engender inherent conflicts in its decision-making practice? Are their superior alternatives?

2. How does one properly define the RBA's financial stability mandate, and where are the boundaries that require consultation with its political masters? (The RBA's latest Statement on the Conduct of Monetary Policy creates new linkages between the financial stability and monetary policy responsibilities of the Bank, which in turn lend support to the idea that the RBA can use interest rates to lean against coincident asset price and credit booms that are not, in the Bank's judgement, warranted by fundamentals.)

3. What exactly is the RBA's monetary policy goal (it is not addressed in the open-ended 1959 Act): are they a flexible, inflation-targeting central bank, as they claim, or do they have a 'dual mandate' in the Fed sense (and not insofar as the unemployment rate is a key forecast variable for core inflation, which is often how the Bank tries to cling to the dual mandate in political forums where it resonates as being more publicly palatable than a singular and seemingly callous inflation target)?

4. How does one rationalise the RBA's present day capacity to, in extremis, modulate fluctuations in the exchange rate? How can the RBA possibly have better insight than the collective wisdom of one of the most liquid and sophisticated wholesale markets on the planet? (I am not personally opposed to this function, but believe it needs fleshing out. The RBA is also the first to admit that it cannot forecast the currency.)

5. What are the magnitude of the taxpayer subsidies that the RBA supplies to the banking system via its manifold "liquidity facilities"? Should these be more fully priced (eg, the extraordinary new Committed Liquidity Facility the RBA has created to enable Aussie banks satisfy Basel III)? Does the RBA support the idea of pricing the currently free deposit guarantee the banks receive?

6. How can the RBA distinguish between insolvent banks and illiquid banks given the definition of insolvency under the Corporations Act, and, if it cannot, why obfuscate the distinction, as central bankers (and the RBA) frequently do? Why not simply recognise that the business of retail banking involves intrinsic flaws--namely, asset-liability mismatches--that require a public liquidity provider, and insurer, of last resort?

7. Does the transfer of senior human capital from the Treasury and RBA to the boards of the large listed banks introduce a Washington-style dysfunction that impedes the practice of independent policymaking and prudential regulation (we currently have Ted Evans, Ken Henry, and Ian MacFarlane sitting on three of the four major bank boards)?

I guess they are some off-the-cuff issues to kick Gideon, or a suitable successor, off. And don't get me wrong: I am a big fan of the RBA's.