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RBA Survey: Currency Swamp Review


So, do these terms of reference specifically address the policy framework and decision-making flaws that need to be overcome? Maybe, but maybe not.

Despite comments that the review is not about taking “pot shots” at the RBA, we must honestly take stock of past performance and systemic issues if we are to move forward.

First, there is the RBA’s failure to meet its inflation target for at least the five years before the pandemic, while wage growth fell below measured productivity for a decade.

RBA lets banks get away with putting most of their loan chips on housing

Second, there is an over-reliance on mortgage credit and the construction channel whenever the economy needs stimulus (and even when it doesn’t). Blindness to a debt-fueled housing boom has now created the preconditions for a market meltdown.

The banking system should help diversify the Australian economy by intermediating credit across a diverse set of industry and sector risk classes. But the RBA allows banks to get away with placing most of their lending chips on housing, via preferred collateral risk weightings. Small businesses literally do not need to apply for loans on reasonable terms.

So, in addition to their formidable “leveraged” license, the banks also get a regulatory pass on risk – at least until the housing market finally crashes. Meanwhile, the economy receives very little help from their businesses to create jobs and the future economy.

Third, there are the many policy reversals, such as the 180 degree turn of quantitative easing in 18 months and the $350 billion in bond purchases to spur COVID-19.

We have seen elsewhere that unconventional monetary policies are a quick fix for managing short-term financial crises, but their continued and widespread use has distorted global markets and will have significant dynamic efficiency costs in decades to come.

Fourth, political mishaps in, for example, the abandoned three-year 0.1% yield target to 2024.

Fifth, blindness to downstream policy consequences such as financial sector concentration, rising inequality and lack of housing affordability.

All this tends to underline that the anchor points of medium-term macroeconomic policy have loosened. Neither our medium-term monetary nor fiscal strategies are effectively binding at this time, which would otherwise provide certainty and predictability for companies and bondholders.

Strong macro policy anchors are important, as are the separation and structures of macro policy branches, including effective review processes. We would say that policies like QE and extremely low interest rates that lead to large debt stocks are the Roach Motel of economic policies. You can check in but never check out.

When it comes to the caliber of RBA examiners, it’s no surprise that we don’t appoint international monetary experts – here the archetype is Charles Goodhart – the kind of people the Bank for International Settlements might call on. for advice.

Perhaps Tim Congdon of the Monetary Institute of the University of Buckingham, Helene Rey of the London Business School, Dick Berner, former director of the US Office of Financial Research, Professor Perry Mehrling of Barnard College or Dr Michael Howell of CrossBorder Capital.

In our view, it is best to avoid the shallow pool of Canberra for a view of the monetary framework and avoid any central banker given the high degree of groupthink that forms at gatherings like Jackson Hole.

A large country should be confident enough to engage in a thorough review of our monetary policy, as well as our prudential and fiscal policy settings. Only then can we be truly confident that our advice on macroeconomic frameworks will be fit for purpose; a robust tool to increase our productivity potential.

An opportunity to reset monetary and fiscal policy operations could be missed here. We must ensure with great hope that this unique opportunity is not missed.