Last night, Captain Glenn Stevens gave a speech to CEDA in which he more or less confirmed the arrival of macroprudential, described it as an attempt to extend the housing cycle not stop it, rambled bizarrely about red tape as the key barrier to competitiveness while ignoring the real exchange rate, though he did discuss improving labour productivity but not capital productivity (the real issue), instead continuing the bank’s recent begging of business interests to begin to invest.
On the first, all good, on the second, we shall see what taking the marginal buyer out of a bubble does, on the third it’s a fail given business won’t invest until there is a profit to be made and new capacity required, and while competitiveness is so weak you can forget it.
In sum, this is a bank being forced begrudgingly into the containment of its own property bubble at exactly the wrong moment in the cycle and grasping at intellectually trivial notions to explain its misjudgements in getting us here.
Address to the Committee for Economic Development of Australia (CEDA) Annual Dinner Melbourne – 18 November 2014
Thank you again for inviting me to address CEDA’s Annual Dinner. Tonight marks the fifth time I have done so, and it continues a long tradition.
My first venture to your gathering in 2006 talked about the role of finance in economic development. An important part of the story was that, through history, financial development and innovation went hand in hand with the extraordinary growth in living standards that flowed from the industrial revolution. Another part was that financial development did not come without its risks, which on various occasions in history had materialised in damaging, or even devastating, fashion. In 2006 we were talking, among other things, about the rise in debt of Australian households and the various risks that might accompany that. We had had a ‘stress test’ focused on such issues, conducted as part of the International Monetary Fund’s Financial Sector Assessment Program. The results had been pretty good actually, but we were not sure how reassured we should be by them. And we talked about an increase in risk-taking in certain parts of the corporate sector that was occurring at the time, and wondered how that would all turn out.
We didn’t have to wait long for answers to those questions. The next time I came to CEDA in 2008 the global financial crisis had erupted and the global economy and financial system were facing their darkest moments since the 1930s. The G20 Leaders had just met in Washington and taken the first steps towards putting the global financial system back on a sound footing.
By then economic growth in Australia had already begun to moderate, but we feared a much more significant slowing could be in prospect. Confidence was shaken and, understandably, households and businesses became much more cautious about spending, taking on more debt, or investing in a new process or idea. The deteriorating global outlook also led to large declines in asset prices and the prices of commodities important for Australia. The feeling at the time was that the terms of trade, which had risen substantially as prices for minerals and energy had reached very high levels, had probably peaked. The falling terms of trade were expected to subtract noticeably from growth in national income over the subsequent period.
It’s a matter of record that, due to a combination of factors, Australia’s economy and its financial system came through that real-life ‘stress test’ remarkably well, all things considered. And, as it turned out, the boom in our terms of trade had further – a lot further – to run.
By the time of the 2010 dinner, it was time to introduce this chart, which has been a feature of my presentations since then. The terms of trade had just broken through the peak of two years earlier and, on a five-year moving average basis, were at their highest level since Federation (Graph 1). Our assumption was that the terms of trade would probably peak that year, in 2010, before declining steadily over the next few years.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.