Well…that was quick. In the early days of last week I wrote a post called “They are coming for the RBA”. In it I described how:
It is one thing to be raising interest rates, or threatening to, when jobs are raining from the heavens. You’re an economic warrior then, gleaming with righteous sweat as you hike the monetary mountain and slay the inflation dragon.
But what about when jobs start drying up, which is where we are now? A whole series of indicators have shown a turning point in the labour market has already passed and an increasing number of private banks are forecasting unemployment rises to 5.5% and even 6% next year. What happens when the RBA straps on its gauntlets and announces its intention to defend the “adjustment” to mining led growth when the peasants are starving? Then heroism starts to look like tyranny (again, no judgement intended).
Even the hapless leaders on the receiving end of the adjustment can figure this one out. They’ll come for the RBA, stoking their hordes into a wild battle cry for lower interest rates, whether it’s to boost housing or to lower the dollar. Depending on how things go, the entire services economy could turn on the, to date, ignored generals sitting on the hill.
It seems that that that battle cry has begun. On Friday, Bloomberg featured an article that attacked the RBA’s decision making process. In particular, the article charged that:
A lack of accountability may undermine confidence in the RBA when Australia’s economy turns, University of Cambridge economist Petra Geraats said.
“Australia would be well-advised to strengthen its monetary-policy making framework to be better equipped to effectively respond when more challenging economic conditions arrive,” said Geraats, who has published articles on transparency and delivered presentations on the subject to central banks from Africa to Asia.
The article goes on to describe four ways in which the RBA is lacking transparency: the votes of individual board members are not disclosed; the absence of an “expert” board and having working businesspeople leading to conflicts of interest; the board members are not permitted to discuss policy in public, and markets have some record of being blindsided by RBA decisions.
The first two arguments are about accountability and the second two about communication. Let’s take the second two first.
The article reckons that:
Stevens’s steps on communication haven’t prevented private economists from having difficulty predicting his decisions. In his five years in office, his calls ran counter to the median of economists’ forecasts nine of his 55 rate decisions. That was more than double the four unexpected rate decisions by the RBA governor during the previous five years.
Fixed-income markets have also been blindsided on occasion. Cash-rate futures on Nov. 1, 2010, were pricing in a 76 percent chance that Stevens would hold the cash rate at 4.50 percent, instead of raising it to 4.75 percent as he did. A month earlier, contracts on the Sydney Futures Exchange indicated a 60 percent chance of an increase the day before the RBA held steady.
I don’t get this at all. Just because some economists and markets get the RBA wrong, that doesn’t mean the bank is communicating poorly. Take it from me as a close RBA watcher, I have more than a enough material to go on: statements, minutes, quarterly big picture updates, speeches and testimonies is plenty to offer a guide to the structure of decision-making. That is, a medium term forecast and accompanying bias with constant reminders of the risks to both, up and down. That doesn’t mean it’s easy to read the outcome when times are turbulent but there is clarity to the process.
At the risk of getting hoisted on a petard later, I think MB has shown it’s quite possible to follow the RBA even in difficult periods and get it right. Moreover, economists getting it wrong is what we call “a market”.
On the second part of the argument that the clarity of communications are inhibited, this time by the black-banning of board members discussing policy in public, the article says that:
“I do find it awkward that the bank has to speak with one voice,” said Bob Gregory, an economics professor at Australian National University and an RBA board member from 1985 to 1995. “The monetary policy debate is more subdued than it otherwise would be if you had board members out there talking about the decisions.”
…While encouraging others to refrain from speaking, Stevens also limits his own availability for comment on monetary policy. He doesn’t hold news conferences like his counterparts at central banks including those of the euro region, U.S., Japan, U.K., South Korea, Mexico, Chile, Peru, Colombia and Canada.
Well, first, as above, I don’t think there’s any lack of material. There has, however, been a sore lack of debate for many years. The black ban may well have contributed to that. The politco-housing complex that surrounds and supports the housing bubble is the result of economic ideology, business rent-seeking, political short-termism and, significantly, media complicity. Lifting the black ban may or may not have altered that. But the likelihood is, with or without extra input, media commentary would have remained as captured by the ideas that drove RBA decisions as anyone else was.
Which brings us to the second question about transparency, whether the RBA Board is sufficiently accountable, especially its business members. Hmmm, my instant reaction is “no” it is not. But, at the same time, I would make a couple of points. First, if you’re going to have business board members then does it help to publicise their votes? Again I would say “no”. I don’t really see the point about conflicts of interest. I mean, business people bring their particular business expertise. If you don’t want that input into the voting process then don’t have them at all. Moreover, to make their votes public would likely unleash a tide of pressure from interest groups upon the members. That doesn’t sound useful to me. I guess the same argument can be applied to the black ban on discussions.
I would add that there is also the problem of impotency when public conflicts actually arise on the board. That is one of the many problems the FOMC has at the moment: a publicly divided board is itself sapping confidence.
In sum, then, I would say that if you’re going to have business board members, it’s best to keep their votes secret and to keep them quiet.
But that doesn’t answer the final question raised by the article. Should the RBA be an “experts” only board? On that, I’m divided. I’ve publicly defended the Board’s record this year on the basis that it has gotten every decision right. But, it’s not clear how that happened. Any simplistic idea that the “experts” wanted to hike rates whilst the business members didn’t was kiboshed by Glenn Stevens last week when he admitted voting dovishly in May and hinted nothing had changed since.
Having said that, if you’d asked me if we needed more “experts” on the board at any time between 1998 and 2006 I would have said “damn right”. In my view, the history of the housing bubble is living evidence that the Macfarlane RBA underpriced credit for nearly a decade. For instance, the following chart of inflation expectations speaks volumes to my mind:
It would also be very easy to blame the business members of the board for voting for an ongoing boom. But I always felt Macfarlane had one eye on politics during the period. Problem is, in the end, we don’t know who voted for what so we’ll never know. The fact remains, however, that the great private credit bubble that inflated during the period was defended by a very strong consensus amongst “expert” economists called the “Pitchford thesis”, that current account deficits didn’t matter so long as the debt was held in the private sector. There is no saying that having all “experts” is going to give you a better result. As the history of the FOMC also shows, expert boards tend to be dominated by ideology. Dissents were as rare as hen’s teeth until recently.
Finally, it’s probably hard to argue against 22 years without a recession. That’s a performance unparalleled globally. Although the current reappraisal of Keynesian business cycle management will, I think, ultimately prove that we’d have been better off with a couple of small recessions along the way to wash out the misallocated household investment and debt accumulation.
When stacked up against their global peers, and given the entire central banking and economics community was singing from the same hymn sheet over the past 25 years, the RBA can fairly claim to be at the top of the tree. Equally, however, it’s obvious that there’s no perfect process to monetary policy decision making by a board of human beings.
