From Max Walsh at AFR today:
Professor Rey, drawing on the experience of the global financial crisis, argues one of the determinants of the global financial cycle is monetary policy in the US, which affects leverage of global banks, capital flows and credit growth in the international financial system.
..She says: “Independent monetary policies are possible if, and only if, the capital account is managed, directly or indirectly.”
This can be done by extending the powers of the Reserve Bank to include macro prudential policies guided by aggressive stress-testing and tougher leverage ratios. The Reserve Bank effectively ceded its macro prudential powers to The Australian Prudential Regulation Authority in 1998 when it became the regulator of financial services. Philosophically, the Reserve Bank sees itself as independent of the government and concerned with financial stability. Macro prudential powers, which could also be called micro-management, could place that political independence at risk.
APRA certainly would fight to keep regulatory responsibility for the most important of our financial institutions.
The commercial banks would regard with horror the very idea of macro prudential policy being wielded as policy as distinct from regulatory purposes.
But, so far, there has been no alternative strategy presented that addresses the flaws in the present system, which load us up with a vastly overvalued currency for what could be a considerable and damaging time.
They don’t need to be merged. They can work together through the Council of Financial Regulators. That’s what it’s for. It was used this way during the GFC when crisis policy was needed. It’s needed again.
Meanwhile, David Bassanese climbs into the time capsule and emerges sometime around 1998:
Given ongoing sluggish income growth, rising asset prices are today a critical transmission mechanism through which low interest rates are helping boost the economy.
…In this regard, we should not be immediately frightened by asset price changes: they are part and parcel of the economic cycle.
Even the RBA is counting on a period of consumer spending growth exceeding household income growth to help turn around the economy over the next year or so.
Note household saving rate trended lower over much of the 1990s and earlier part of last decade – which was a time of rising sharemarket and housing wealth. Indeed, near the height of Australia’s “mini” house price bubble in mid-2002, the household saving ratio has sunk to negative levels.
…The hope is that these recent wealth gains – by improving private sector balance sheets and confidence – can prove self-validating, by in turn lifting the willingness of business and households to spend. Indeed, there’s already tentative sign of these effects at work: the Westpac/Melbourne index of consumer sentiment rose by 1.8 per cent in November to be modestly above long-run average levels. Consumer sentiment towards the purchase of major household items is also back at the top end of its long-run range.
…Importantly, while both housing and sharemarket valuations are no longer as cheap as they once were, they are still far from bubble territory. Accordingly, recent price gains are at this stage still likely more pleasing than worrying for the Reserve Bank of Australia.
Global share markets are widely considered to be in bubble territory already. Even the profligate Fed wants to prevent the build up of risks getting any larger. Household income to property ratios are six months short of the 2002 peak, which on Bassanese’s own terms was a “bubble” so how can they be so “far from” the same now?
There is one crucial difference between now and then. The RBA popped the 2003 Sydney bubble just as the mining boom took off around the country. The reckoning was averted by a positive external shock in the terms of trade. As such, house prices rose everywhere except Sydney as incomes boomed and the economy weathered the Sydney adjustment.
This time around we face the opposite reality. The terms of trade are falling and will drop further most likely. As well, the mining boom is heading over the capex cliff. Either the RBA will have to continue to grow the bubble right through this episode, which runs for three years, or it will have to stall prices at some point only to find no business investment beneath the froth, making the adjustment more difficult not less.
That we can see this coming makes makes an asset inflation policy bafflingly reckless. What’s more, it is shown to be so by the laudable RBNZ, which is doing precisely the opposite on the mere risk that New Zealand might one day face our own cast iron reality.
