MB’s campaign for Australia’s financial regulators to adopt macro-prudential curbs on higher risk mortgage limits has received a shot in the arm today, with two Godfathers of Australian economics – Ross Garnaut and Bob Gregory – coming out in support of such measures.
Garnaut is one of the architects of the open economy policy settings that have delivered decades of prosperity, whereas Gregory is the local pioneer of arguments about the effects of Dutch disease. Both are eminent Australian economists.
From the AFR:
Professors Gregory and Garnaut told The Australian Financial Review regulators should consider measures to limit bank lending, using what are increasingly known around the globe as “macroprudential tools”.
“If you are worried about the risk of a bubble in the housing market, the simple and logical thing to do is remove the privileged risk-weighting of housing in bank capital adequacy ratios,” Professor Garnaut said.
“That puts it on them to be careful as capital costs them more”…
“We want to remove constraints on interest rate reductions,” he said. “The broader economy is doing shithouse but most importantly what the broader economy needs is a lower exchange rate”…
Professor Gregory, who was a member of the Reserve Bank board between 1985 and 1995, said the current situation reminds him of the late 1980s, when surging asset prices forced the central bank to jack up interest rates to record highs…
“But if the [slowing] mining boom leads to further deterioration, which I think it will, the pressure will be for interests rates to go lower and then the bubble thing becomes much more of an issue.”
He agreed with the need for regulatory action, as long as it was temporary…
Professor Garnaut said the primary focus of monetary policy should be to lower the dollar to help industries exposed to foreign competition such as manufacturing and tourism, rather than create a temporary housing construction boom to replace fading investment in resources projects.
Spot on. These arguments are similar to those put forward by the RBNZ governor, Graeme Wheeler, who stated that macro-prudential curbs on high risk mortgage lending are required in order allow the central bank to lower interest rates further (or keep rates lower for longer), in turn placing downward pressure on the currency and supporting trade exposed industries without further inflating house prices.
As argued previously, governments of all persuasion have abrogated their responsibilities for housing policy to the RBA – allowing affordability concerns to be addressed via continuous lowering of interest rates, rather than addressing the underlying causes of poor affordability and low rates of construction through supply-side and taxation reform.
Therefore, another benefit of implementing macro-prudential controls on mortgage lending, combined with jawboning by the RBA on the need for structural housing reform, would be to force governments to take responsibility for housing and address the problems head-on through policy action.
Interest rates are too blunt an instrument to successfully manage both housing and the economy. More tools need to be added to the regulators’ arsenal, along with concerted policy reform by the government to address the underlying structural issues.
