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."

Thursday, December 23, 2010

RBA's reform appetite is too weak...But there is hope!

As I discussed in the post below, the Bank of England's Andy Haldane has given yet another thoughtful speech. I've said this before, and I will say it again. It would be wonderful if the RBA shed its considerable shackles in this regard. RBA speeches are extraordinarily conservative compared with their BoE counterparts. And RBA speeches very rarely contain original research (the last I can recall is a speech on the housing market by Tony Richards). In contrast, Haldane (and his colleagues) always try to present new analysis in their public pronouncements, even if it is sometimes simplified for easy digestion.

For mine, these differentials point to a wider institutional malaise. For largely no fault of its own, the BoE has had a bad crisis. The UK banking system collapsed. As a consequence, the reform appetite is very healthy indeed. The BoE leadership is being ruthlessly honest with the community about the changes that need to be made to protect the system from the next crisis. This is one of the perverse benefits of bad luck: you are much more motivated to work to tilt the probabilities in your favour the next time the sh-t hits the fan.

In comparison, Australia had immense good fortune. That is, we had a great crisis, and hardly felt the effects of the offshore storms--just a wee bit of turbulence. As an unsurprising consequence, the reform appetite within the RBA is weak.

Australia's good crisis has reinforced the RBA's natural conservatism and tendency to resist change (remember they opposed the creation of APRA). This has led to it obfuscating about governance problems (eg, executive leaks to journalists), obfuscating about reform challenges in preference for defending the status quo (eg, the patent unwillingness of staff to voluntarily and actively engage with the public on the moral hazard and too-big-to-fail debates of the day), obfuscating about its own unusual role in the economy (eg, arguing on the one hand that taxpayers should not wear more private sector risk, but creating new linkages between itself, a taxpayer-owned institution, and the private sector as seen by the RBA's response to BASEL III), obfuscating about financial stability risks (relentlessly talking 'up' the system and the work of regulators rather than apportioning more time to discussing the downside hazards), and a clear propensity for quashing policy innovation.

While this is perhaps a topic for another day, since the RBA is, unlike the Treasury, rarely involved in genuine policy formation (the last two years have been a limited exception to this rule), it is not culturally adept at dealing with it. When faced with policy change, its instinctive reaction is to fight to preserve the incumbent structures.

Now I don't want you to get the wrong impression. I am one of the Bank's biggest fans, and have showered it with nontrivial praise on recent occasions. I have regularly argued that the RBA staff are world-class. I think that generally Glenn Stevens is developing into an outstanding Governor. But I would not be a true friend of the family if I was disinclined to offer tough love.

A related concern for the RBA is its institutional DNA. This was a point raised with me only a copy of weeks ago by one of the government's most senior advisors. The RBA almost never hires high-level executives (eg, Assistant Governors) from outside the organisation. It is, frankly, intensely incestuous with a Japanese-style lifetime employment culture. In the last 20 years, there has been only one noteworthy exception to this: Bernie Fraser, who was imposed upon the Bank by Treasurer Paul Keating. And in many ways, Bernie was the best thing that ever happened to the Bank.

The point is that the RBA leadership should be looking to pro-actively diversify its gene pool before somebody else does it unilaterally. One obvious solution here is to make the next Deputy Governor appointment--or someone at a similar level--an external hire. For quite some time I argued along these lines in favour of the RBA addressing the historical absence of any females in Assistant Governor positions. And for the first time ever, they responded by making just such an appointment this week.

I have confidence that the RBA listens, and that it will seek to evolve. Unfortunately, there are not many outsiders for the RBA to listen to. The fact is that there's a critical lacuna in the media about the RBA since key commentators rely on the Bank for their 'good oil'. This is not overly healthy, as I have observed before. There is, therefore, value in independent folks, such as Stephen Kirchner and myself, offering up some objective feedback.