Chris Joye does a good job this morning of summarising the unanswered questions around the RBA scandal:
Three important questions remain outstanding. First, has the RBA misled Parliament and the federal Treasury about what it really knew in 2007, as the key whistle-blower claimed on ABC Four Cornerson Monday night?
Second, should the RBA have prudently reported to police back in 2007, extremely serious bribery allegations made by the company secretary of one of its wholly-owned entities? And, finally, on what basis has the Australian Securities and Investments Commission concluded that the directors of companies charged with bribery have not breached the Corporations Act?
ASIC has rather pathetically reopened the case this morning around the Iraq allegations, which I deal with elsewhere. But in this post I wish to address another concern. Let’s leave aside the role of the central bank in upholding publicly expected norms and law. My concern this morning is that as a long term RBA observer in the marketplace, I no longer understand the values of the organisation or its head. And that has undermined the clarity of my thoughts on future directions for monetary policy.
Let me explain.
For the past three years I have had a good record of forecasting RBA meetings, getting just one wrong. This has been based around many variables but one of the most important has been my belief in the integrity of Glenn Stevens. There were good reasons to rely on the Governor’s judgement.
Once he ascended to the top job in 2006, it was immediately apparent that the good ‘ol days of easy Ian Macfarlane, in which inflationary trends were allowed to develop and run, were over. This was captured most graphically in the 2007 when Glenn Stevens oversaw rate hikes amid an election campaign fought in part over promises to prevent them. The Governor earned the lasting enmity of the whips within the Liberal Party for doing the right thing.
The Governor’s integrity was on display again in 2009 when he jacked interest rates ahead of the world, choking off the housing bubble of the time, and taking the hard decision to force structural adjustment onto the Australian economy amid a renewed mining boom. Again on this occasion he was offered no support by the Government of the day, this time Labor, which was busy spending hand over fist and then buggering up the mining tax.
Glenn Stevens’ post GFC performance was also excellent. He oversaw a philosophical awakening at the bank that tossed out many sacred cows of the preceding period. He articulated and oversaw action on a loss of faith in wholesale funding for banks, a loss of faith in Pitchford and efficient market theses, a loss of faith in bank prudence and the rise of moral hazard.
The outcomes were not perfect. And the bank embraced too much secrecy in its executions. But the overall discourse and shape of change had integrity.
Then we had the 2011 “bulhawk” scare in which much of Australian economics lost it head as inflation fears overwhelmed obvious economic weakness amid the RBA engineered structural adjustment. The RBA itself defied its own rhetoric that year, refusing to hike too far and relying on data instead of its own dodgy forecasts. It was text book central banking with integrity, putting the economy ahead of its own narrow interests.
All of this has led me to trust that the RBA would do the right thing with policy under Glenn Stevens and so I’ve been right much of the time.
But now, after the revelations of the past few days, that trust has been shaken. The allegations of boys club corruption have left me wondering if there is not some other set of value at work within the organisation. The secrecy surrounding much of the banking reform, that I’ve interpreted too date as institutional caution, might be something less admirable. Glenn Stevens’ large salary increase, which I’ve interpreted as legitimate insofar as it supports retaining the best talent, might show something else. The RBA’s failing rebalancing program, aimed at increasing housing construction but having far greater impacts on house prices, might be a mistake, or something less forgivable.
I have been a great admirer of Glenn Stevens and wish to continue to be but I’m trading in an uninformed market.
