Keating backs macroprudential


From The Australian:

“The world is fundamentally unled…Fiscal policy is not led in America by the secretary of the Treasury and there is no European fiscal union…Therefore central banks have stepped up to take the responsibility for the absence of political leadership in fiscal policy.”

…He also warned the government not to be too aggressive about reining in the deficit.

“We should be wary about trying to artificially pull the budget back into surplus prematurely,” he said.

“I think it would be a mistake for ambitions about the return to surplus taking precedence over the budget’s role in supporting the economy in what is a very, very soggy world of activity.”

…”The central banks have stepped up to take responsibility for the absence of leadership in fiscal policy,” he said.

…”Formerly, central banks have been monetary authorities. We are going to move from the macroeconomic world to a macro-prudential world where central banks determine the prudence with which banks and financial institutions lend.

“This will mean capital ratios, the ability of banks to invest in their own behalf, proprietary trading — all of these things are going to be determined by central banks. This is not simply central banks doing as they formerly did,” he said.

Mr Keating said this would be a positive development as the central banks of the world were moving to become a “reinforcing arm of national policy, outside of the political system”.

All good sense from a titan of Australian economic policy-making. As Gittins says today:

Kerry O’Brien’s four interviews are a reminder of Keating’s indisputable claim to be our greatest, most reforming, treasurer.

If you’re tempted to doubt that, consider Business Council president Tony Shepherd’s description of our economy in the early 1980s. Keating had described it as a ”moribund, inward-looking industrial graveyard” and he’d been right, Shepherd said.

”We had a fixed exchange rate, tariffs [on imports] were still high, we were frightened of Japanese investment … our financial system was tightly regulated, our industrial relations system was centralised, complex and unproductive, and just about every service was provided by the public sector. State ownership extended to banks, insurance, telecommunications, airlines, ports, shipping, dockyards, electricity, gas etc,” Shepherd said.

Keating was the instigator of virtually all those reforms. And though many of them weren’t opposed by the Coalition opposition, they were radical reforms – brave steps into the unknown – controversial in the community, including among many Labor voters.

On both sides of the aisle, our contemporary brood are steadily rebuilding the uncompetitive and closed system of government-favoured businesses that led to the need for the Keating reforms in the first place.

David Llewellyn-Smith
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  1. Remind me why we still need elected politicians then, if the monetary authorities are going to set the economic, and so the social, path for us via their control of the financial system. The permanent civil service can quite competently follow their instructions without the pretence of the people, by the people, for the people.

  2. Keating needs to read this new study from the B.I.S, and so does all the other pundits on this issue:

    “Can non-interest rate policies stabilise housing
    markets? Evidence from a panel of 57 economies”

    In the conclusion of the study they say:

    “…..None of the policies designed to affect either the supply of or the demand for credit has a discernible impact on house prices. This has implications for the degree to which credit-constrained households are the marginal purchasers of housing or for the importance of housing supply, which is not explicitly considered in this Study……”

    Some of the macroprudential measures DO control credit expansion, but do not affect housing affordability and ownership.

    It has been obvious to me for some time, that “supply” of land for housing pretty much determines who will be “priced out” of housing of each level of quality/attributes (or indeed, priced out of housing of their own altogether). The availability of credit merely determines “the level of debt” assumed by each quintile, with household formation and purchase of property occurring earlier (for those who do get to buy at all) than if savings (and family finance) were all-important.

    I don’t know why it is taking the best and brightest in the mainstream so long to grasp this simple and obvious reality regarding how markets function. This B.I.S. study is massive confirmation, and I hope the rest of the dots will take not too long for the best and brightest in the mainstream to connect up.

    • Meh. We read that. A surprisingly thin piece of work.

      There’s plenty of evidence MP works. the RBA’s own research shows it’s quite effective.

      But you’re ignoring the other half of Keating’s tirade. He has acknowledged that CB’s are being forced to lead because pollies won’t. By definition that will lead to distorted solutions.

      • It’s only “thin” because there is so little application and results of policy in practice, to observe so far.

        I will stick to my intuitions and the real life data so far, such as South Korea’s amazingly stiff LVR restrictions, which have not constrained either credit growth or house prices.

        I know you agree that housing supply is important; I say everything else is pissing into the wind when it comes to home ownership opportunities and affordability.

        And if you get supply right, you don’t need any of the other demand-restriction policies that don’t work anyway. I would not be against enacting some of them anyway just as an insurance, but meanwhile we are just losing time in progressing towards the real solutions, by expecting Macroprudential policies to achieve very much in the absence of housing supply reform.

        I agree that central bankers are having to force government in the right direction, but if they want to minimise credit expansion most effectively, they will have to abolish mortgage credit altogether. A total absence of mortgage credit in South Korea (eg as far back as the 1970’s) resulted in high net savings to go with unaffordable housing and bottom quintiles locked out of ownership. As soon as mortgage credit was introduced, even with incredibly stiff LVR restrictions, the net savings position morphed rapidly into a debt-based bubble.

        And it is impossible for anything central bankers do, to keep house prices down and ownership up, as long as supply of land for development is rationed. It is probably also impossible for anything “fiscal” to achieve anything on this score either. It might be possible to keep median multiples down to, say, 7-9 with fiscal policies and DSTI restrictions.

        Only elastic supply of housing will keep them down around 3 and maximise opportunity for home ownership.

        A combination of inelastic housing supply, easy credit, mortgage interest tax deductibility and a few other demand-side “home ownership” policies are what underlay Californian cities median multiples peaking at over 11. If they reversed the fiscal and monetary and macroprudential settings to “demand restriction” rather than “home ownership” they might succeed in keeping them below 9.

        Shall we wait and see who is right? I wonder how many years of wishful experimentation it will require. I think the BIS report deserves massive credit for arriving at such definite conclusions with such thin data to go by.

      • We can’t possibly know LVR restrictions consequences until they have been in place for years. Market reactions in the first couple of weeks are not much help.

  3. What if centralised wage fixing, the system dismantled as a part of the 80’s reforms, was the mechanism which institutionalised egalitarianism in Australia.

    Can such ethics survive the major revolution we are living through, the effectively singular unit of access to income, in the context of redundancy of labour, becoming ownership? In such a world if you don’t own how do you share? You can’t work for it.

      • Hmmm… In what areas HnH?
        I’m certainly not part of the “we”. IT wages have being stagnant/falling my whole (short) working career due to the wonders of 457 visas and massive offshoring.

      • “It sucks that those aggregates don’t reflect my industry.”

        What field of IT are you in?

        I work on large back-end systems for financial companies and my salary has increased fairly regularly and I could make a reasonably large jump if I switched companies.

        Perhaps the difference is that I’ve been working for longer and am more senior? I’ve seen plenty of off-shoring but it’s more for the development work while someone (me) still has to produce the designs and verify that they’ve actually been implemented correctly.

        And no, I’d never buy any financial products that my employer sells.

  4. What type of MP tool was Keating suggesting if any?

    I didn’t see anything about maximum LVRs ….. which a lot of people are now skeptical about.

    • As South Korea proves…….

      LVR’s consistently around 50%; house price median multiples consistently between 12 and 16; and a significant debt overhang.

      • Yup there you go. Unfortunately, with all due respect MB authors, you suffer from substantial confirmation bias. Once you’ve got a position you stick to it no matter what.

        As for maximum LVRs it seems to fall into the category of being seen to be doing something about the problem but really finding an excuse to make it worse (lower interest rates).

        Oh dear.

      • If Keating talked about things like Capital ratios and NOT about LVR’s, he is a wise man.

        Yes, some macroprudential policies will help make the financial system safer. They will NOT do anything for housing injustice as long as there is a racket in the supply of land for housing.

  5. ceteris paribus

    Keating is right in suggesting that the Liberals should not be panicked into becoming “deficit darleks” in these soggy times. At the very same time, there are excellent reasons for promptly attending to wasteful expenditures- middle class welfare and industry welfare- which never should have been introduced in the first place and represent structural deficits in the longer term budgetary context.

  6. What strikes most about the Keating interviews is how our current Parliament is mostly a gaggle of intellectual lightweights that have found power by political machinations and towing the party line.

    Our current crop of idiot politicians are staring in the face disastrous monetary policy (led by Greenspan and carried on by Bernanke and sheepishly followed around the world) that has undeniably impoverished society and turned the community against itself, and yet they do nothing.

    That they can’t even discuss the stupidity of the current monetary policy, let alone even get to possible solutions like macro prudential, is pathetic.

    • There’s two points to draw from Keating: the getting of power and the using of power. What seems to happen is that we have politicians who paid attention to the first part, but then stopped listening, and they’re clambering to the top for the sake of being at the top.

      This is what everyone talks about when it comes to lightweights – people who are so flexible in their positions just for the sake of getting to power that they then lack an agenda other than the retaining of power. In the interviews Keating repeatedly made the point to say that political capital is designed to be spent, which is something that Rudd didn’t do with the ETS for instance, backing down in the face of a populist anti-tax discomfort.

      • Yes. I’d agree with that. Keating also had the extraordinary vision to look through the noise and do what was right – something that i’ve since noticed is very very rare in politics.

        Looking back, his response to the Mabo case really showed the difference between a great leader and a politician.

        I would say it is a great failing of Australian politics that Keating is not still in the Parliament. His best years are still ahead of him, as they are with many of our past leaders and yet we have these 40 something wet behind the ears that are only interested in their careers not the country.

  7. A person who reveled in being disliked and was prepared to make the tough decisions yet had the good of the nation at heart. Rare as hen’s teeth. Abbott likes being disliked but that’s it from what I can see.

    • At least Keating & Abbott were elected, like all politicians. Having an unelected CB dictate MP and IR’s sounds like a disaster, and based on their track record here since the late 90’s it’s certainly not something I would want them empowered with. 100% LVR’s, 0.1% interest rates, 2-3% inflation targetting, 20% house price inflation targetting,etc, would not surprise me in the least from the RBA.

  8. I hold the view that Paul Keating was the worst Prime Minister Australia has ever had. He did the dirty on the average working class Labor voter.

    He adjusted the economy to suit elites.
    He backed-down to the Real Estate lobby and reinstalled negative gearing.
    He cut wages and instigated a moronic superannuation scheme that would suit elites but harm workers.
    His economic reforms stripped workers of some fairly mild rorts while he allowed the rorts of the elite to stay and increase. Look at the enormous wealth disparity around today. Keating kicked off this process and supports it today.

    He and Bob Hawke oversaw terrible damage to average workers via bracket creep. Hawke and Keating took over tax rates from Fraser/Howard that had a quite reasonable tax-free threshold and the highest tax rate only affected the richest workers. Hawke and Keating failed to increase these levels to match inflation. More poor workers had to pay income tax, and many more middle-class were paying the highest income tax rates.
    Keating engineered crippling poverty traps so that many poor people would lose (for example) 75c in every dollar they earned, via lost benefits and tax.

    He said “if you can’t control wages you can’t control the economy”. Now he says that Central banks saved the economy, and he also says that a deficit supports the economy. He seems to just prattle-off economist waffle that is flavour of the month – no real basic understanding there.

    If Keating had been in the Liberal party and had run a campaign of helping the rich get richer, then perhaps we could consider him to be a success for his constituency. As it stands I consider him to be the world’s best treasurer in the same way that Tanya Plibersek was the world’s best housing minister. Thanks for nothing!

    • It wasn’t just Keating and only in Australia – many developed economies have participated in/witnessed the erosion of the middle class and containment of the working class.

      Early Keating I quite liked, mid to late Keating not so much. There is way way to much adoration directed at Keating. God forbid Plibersek gets anywhere close.