Labor commits to MB’s RBA review

For years we have been pounding away at the need for a comprehensive review of the structure of Australian monetary policy. It’s been obvious since the end of the commodity boom in 2011 that it was needed. As the rest of the world embarked on brave experiments in monetary policy – everything from macroprudential tools to fiscal bullying to including asset prices in mandates – the RBA and APRA stuck their collective heads in the sand and helped deliver an economic lost decade to Australian households.

Now, finally, we’re seeing an awakening:

  • Shadow Treasurer Jim Chalmers has backed calls for a review of the RBA and how it is working with fiscal policy.
  • Failing to reach full employment or inflation targets should be looked at.
  • It is 40 years since we last reviewed the RBA.
  • Blueprint Institute says the RBA protection racket is a “cancer”.
  • Treasurer Frydenberg resisted the idea (of course)!
  • John Edwards says we need an even broader inquiry into the economy.

What should such a review look at? I put it down into three major categories.

Monetary policy structure

  • Is the separation of the RBA and APRA appropriate today?
  • How can inflation goals be met in a world of zero interest rates and currency devaluation?
  • How should macroprudential and other unconventional tools complement the cash rate?
  • Is an inflation target that excludes asset prices relevant any longer?

Monetary policy theory

  • Does the efficient market hypothesis still hold currency for central banking?
  • Why has inflation failed to materialise given monetarism says it should have done so long ago?
  • How does debt fit with the picture in the long run? Is it time to abandon the Pitchford thesis?
  • Does setting the cash rate and letting the market take care of the rest deliver national interest outcomes?

Monetary policy practice

  • Should the RBA be free to comment on such issues as immigration and fiscal policy given they impact its job?
  • Does a board of rent-seekers infecting decision-making make sense?
  • Has the RBA culture become insular and withdrawn from new ideas?

These can be fleshed out with many more questions, not least being RBA accountability and corruption scandals.

There is zero prospect of the Coalition undertaking this task. All it wants is captured regulators and higher house prices. Labor should 100% do it instead, given it also offers a framework through which housing affordability can be addressed without scaring the horses before the election.

David Llewellyn-Smith
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Comments

    • Under the new standards introduced by the Victorian Government properties must:
      Include lockable windows and external doors;
      Provide a working kitchen and toilet;
      Include window coverings in bedrooms and living spaces to provide privacy;
      Provide a fixed heater in any property. By 2023, this heater must have a two-star energy efficiency rating;
      Contain a shower head that has a water saving rating of at least three stars;
      Have checks of gas or electric appliances like stoves and heaters every two years;
      Ensure there are proper switchboards with circuit breakers in rentals.

      Most of that seems reasonable but what does “lockable” mean in terms of windows and why a “fixed” heater?

        • Cynical snake

          Presumably it was also cheaper than one that would pass, so do you want the option of cheap, or do you want the government to take the cheap option away.

          • Andrew Veniamin

            Land lords will only raise the rates above market equilibrium if there is a deficit of supply – this has not been the case for several decades.

            So false. Nice try though Nath.

          • Having lived in such a dump and had to bear the brunt of it not being up to spec because the landlord wouldn’t do it, I’d take a slightly more expensive rental next time. I was only there because it was so hard to find a place where I could have the dog and we got the dog mid rental so felt very stuck. I would not tolerate such living conditions again.

          • Cynical snake

            “Land lords will only raise the rates above market equilibrium if there is a deficit of supply – this has not been the case for several decades.

            So false. Nice try though Nath.”

            lolololololol.
            So rents have inflated massively due to the lack of a deficit of supply?
            Guess what else. If you make a whole heap of houses no longer eligible to be rentals because they don’t meet standards what does that do to supply you moron?

      • Lockable is common-sense reasonable lockable. Fixed heater because otherwise the landlord could remove the . heaters (in every room!) after inspection, or even move them from from dwelling to dwelling.

  1. The RBA has ONE lever.
    Expecting it to control an economy using that one lever is a pretty tall ask, and results in the “perverse” outcomes seen.
    Either give the responsibility back to the government or accept that sub-optimal outcomes are what is going to happen as the lever needs to interact with others to achieve any sensible outcome.

      • pfh007.comMEMBER

        More levers for the “independent” RBA?

        Why not just shut down parliament and let the RBA run the economy completely and forget about that old fashioned thing called democracy and accountability.

        Is there something wrong with ending the bank monopoly of deposit accounts at the RBA ?

        That should be at the top of the MB list for RBA reforms.

        It is remarkable how open access to RBA deposit accounts and forcing banks to compete with everyone else for unsecured loans without the benefit of a taxpayer guarantee is just a bridge too far.

        Over in Beijing they must be thrilled by the strength of the glue sticking the west to their outdated public money / banking status quo.

        • Would having bank accounts at the RBA be the same as having bank accounts at the commonwealth bank before it was sold?

          If the taxpayer is providing guarantee for banks the taxpayer should own them.

          • pfh007.comMEMBER

            Maf,

            No it would be different. The commonwealth bank made loans and paid interest on deposits.

            Deposit accounts at the RBA would not pay any interest as the RBA does not (or should not) be lending money to anyone.

            The point of the exercise is to allow the public to save in the form of an account containing central bank liabilities. It is just an electronic form of notes and coins issued by the RBA.

            At the moment the only way you can “save” using an account is by making unsecured loans to private banks which they call “deposits”.

            Think of the RBA deposits as being the 100% liquid and risk free form of savings and if you want interest/return you need to take risk and make an investment. One investment option is to make a loan to a bank and hope they return your investment with interest without going broke.

            If you want a publicly owned institution that makes loans and accepts unsecured loans from the public and pays them interest on those loans that is possible but it is very different to what I am describing. Keep in mind that publicly owned institutions that make loans and rely on unsecured at call loans can go broke just as easily as private ones.

          • pfh007.comMEMBER

            I don’t think so.

            Keep in mind that we don’t currently have any reserve requirements in Australia.

            Allowing the general public and non-banks to operate deposit accounts has little to do with full reserve or fractional reserve.

            Certainly, allowing the public and non-banks to operate deposit accounts at the RBA is likely to lead to closer regulation of private bank credit creation as there is an implicit move in the proposal to a greater role for central bank liabilities in the monetary system but the nature of that regulation is not pre-determined.

            Personally, I think it will be best if the banks are required to be fully reserved as I think the public’s interest in the banker’s privileges in the current model are overrated and if we are going to create new public money it is only equitable that everyone gets a share.

          • Display NameMEMBER

            Dont we have capital adequacy requirements under Basel III?
            Works somewhat like a reserve requirement.

          • pfh007.comMEMBER

            “..Works somewhat like a reserve requirement…”

            Yes there are capital adequacy requirements but they are different to a reserve requirement.

            The amusing thing at the moment is that because the RBA is desperately trying QE they are stuffing the banks ES accounts full of deposits as they buy up government bonds. So the banks have lots of reserves/deposits which they don’t like.

            It would make much more sense to allow non-banks and the general public to operate deposit accounts at the RBA as then that could provide an alternate source of liquidity in the economy that is easily plugged into the payments system.

            Considering that the banks are paying close to zero for the unsecured loans advanced by the public to them (aka deposits) more than a few people might be keen to withdraw their unsecured loans to the banks and deposit the proceeds into RBA deposit accounts.

            The monetary system would be much more stable if a large chunk of the money supply was in the form of RBA deposits as people could use them to settle transactions without the involvement of the banks.

            Naturally the banks simply hate the idea of a public monetary system where they are less critical and there is a greater role for central bank liabilities.

          • Thanks for the reply, 1 thing that stands out to me if governments don’t want people to use RBA notes & forcing people into the private banking digital system.

          • pfh007.comMEMBER

            Yes – that is exactly what this is all about.

            Forcing the public to use a bunch of dopey private banks. In my view we are much more likely to have competent and skilled banks if they are forced to work to persuade the public to choose between a zero interest deposit at the RBA or an unsecured loan to a bank. How hard is that? It is pretty pathetic that banks reckon they could not compete with an account that would pay zero percent.

            At the moment they are lazy and complacent from having the state force the public into business relationships (making unsecured loans aka deposits) with them.

            A healthy fit and competitive banking sector is what we need.

            Is that too much to ask for?

      • Andrew Veniamin

        Why have you not mentioned / included your position on the RBNZ levers which include housing stability – i recall you were onside with this – maybe I recall incorrectly. I felt it was a good option and should be noted ? Is it outside your assessment on this issue as you are considering higher plane of issues rather than actual levers ?

    • Jumping jack flash

      the system is very simple:
      Banks create and sell debt. Then you need to pay for it.
      These days debt is paid for using more debt. There isn’t enough real money left to pay for all the debt.

      It doesn’t matter who pays the debt bill, just that it gets paid.

      These latest shenanigans very simply translate into the government and RBA footing some of the people’s debt bill.
      And its about time!

      Leading up to COVID, the people owned 4 times more debt than the government! It was time for the government to start holding up their end. I think the government doubled their debt, but it is still the people who are on the hook for most of the debt sloshing around in the ocean of debt we call an economy.

  2. The Pitchford Thesis only ever made sense with Pettis addendum – the investment implemented from the capital account surplus must be profitable.

    It’s never been clear to me that buying and selling houses in an inflationary game of pass-the-parcel actually qualifies on that test.

  3. Ritualised FormsMEMBER

    The RBA is being positioned to become central to the upcoming election campaign.

    It is fairly obvious already that house prices are going to be let rip, and that consequent to that the blame will need to be carried – the RBA is a very convenient receptacle for that.  From there, both the government and the RBA are probably acutely aware that the sun is setting on the era of monetary policy and inflation targeting as we have known it for a generation.  The sun will rise on a new area which will overtly address the failings of the NeoLiberal era – we can assume it will more clearly address house prices (and probably asset price speculation of all sorts), wages, and quite likely involve a recalibration of inflation, employment, and what on earth ‘productive’ investment probably is.  Presumably that will be accompanied by significant changes to tax and regulatory settings.

    Our current government isn’t likely to be that natural a vehicle for any of that, but at the same time it will be acutely aware of the limitations of what we have – and in an election campaign where wages and house prices are going to be an issue it is going to be in ‘blame apportionment’ mode – an RBA which is going to be rebirthed no matter what is likely to be an ideal target, and presumably APRA will be tossed onto the fire as well.  One assumes that those within the RBA – noting that there are plenty of ex-RBA individuals at banks and academia who will be in better position to distance themselves from the NeoLiberal era – will presumably include some of those given a bit of a public dusting.  The Governor would be first in line.

    Beyond that dynamic though the ALP is at last starting to set the scene for an economic policy overhaul.  The overall need is for the economy to move away from the population Ponzi and mining revenue redistribution into house prices model it has been on for donkeys years.  The ALP surely wont even think about stating things that baldly, but refocussing on productivity (noting that land costs, and energy costs and a range of other fixed costs tend to be the biggest drags on local productivity, and the simplest way to get wage costs down will be to angle grind the cojones off the dollar).  The government is going to have to fairly overtly run a ‘look at how good things are now!’ and ‘you wouldn’t want to let the ALP take the shine of your life’ sort of campaign.  Given a large number of pensioners who have been trying to live off savings get 0% interest, a large number of employees who haven’t had a payrise since circa 2013, and an OECD leading number of casualised employees who can be turned off at the flick of a switch – including a staggering number glued onto public sector (and budget funded) functions – for whom income security will be a significant issue, we assume the basic electoral divide will be about there.  The ’go to’ sector for making everyone feel better, or to provide an economic ‘hit’ has been house prices.  It has side effects we all know, but it would currently appear that the government is more than prepared to let them run in the hope that the surge in prices will make enough Australians feel better (and more like spending). That would have most tradies and construction types welded to the government.   Again they will peel off a range of capital outlay concessions for the small business set (a better than anticipated budget position will facilitate that nicely).

    That’s a large part of the economic lay of the road up to polling day.  From there we have the side issues of China (and how much they buy of Australian things – as well as how robustly they start pushing their views on their near neighbours, and how this may translate into Defence spend) and climate (how much do we spend on warming mitigation – what is desirable in terms of economic stimulus as well as what is likely to work from a scientific/technical sense).  Things like the community battery will burnish ALP credentials and may go some way too offsetting the governments use of capital offsets for small business as an electoral traction.  The 64 million dollar question will surround how both sides of politics address immigration.  The LLNP will obviously hang onto as much as they can of the coolies for picking fruit and the agricultural sector, but beyond that they may well be already sniffing the implausibility of education ‘exports’ – in the form of citizenship for those paying top dollar for Australian university courses – as being less than a good bouquet with an electorate which is experiencing the traffic jams and queues in the here and now.  The ALP would want to be very careful in articulating its position also.  It will no doubt have the open borders brigade touting the rights and obligations for freer immigration, but one assumes (always a risk) that there will be those within the party who might observe some immigration toning down may be worth a try.  But any sign of a sudden downturn in house prices and one would imagine that both sides would be keen to limit that, and the easy way to limit house price falls is to get more migrants – an outrider there would be any worsening of the China-Hong Kong or even China – Taiwan scene which sees a sudden surge in migration from both locations and Australia taking these.

    My thoughts at this stage

    • Ailart SuaMEMBER

      Pretty much agree with your thoughts, RF. The only thing missing is a solution. And IMO, I don’t think there is one, apart from changes to the Constitution and electoral system that puts a ‘fire-wall’ between the people’s democracy and elite donors – and of course introduction of legislation that ensures genuine accountability. If people believe the ALP is the ‘silver bullet’, then I’m afraid they’ll be disappointed.

      Personally, I think the whole, primitive, Westminster-style, leadership selection process should be scrapped and replaced with a system similar to the corporate model. In basic terms, the Australian citizens (shareholders of Australia PTY LTD) vote for a board of directors. The directors install the PM and cabinet ministers, who’d be sourced from the greater community – or from offshore if necessary. They’d be quality people, excelling in the fields relevant to their ministerial portfolios. Remuneration would be set at levels equivalent to private enterprise (or better) and they’d be subject to high levels of accountability – and dismissal if they didn’t perform satisfactorily. State and territory governments would become redundant.

      Food for thought…

    • MathiasMEMBER

      > we can assume it will more clearly address house prices (and probably asset price speculation of all sorts)
      > But any sign of a sudden downturn in house prices and one would imagine that both sides would be keen to limit that, and the easy way to limit house price falls is to get more migrants

      hrm. ok.

  4. happy valleyMEMBER

    “Does a board of rent-seekers infecting decision-making make sense?”

    No. Nor does loading it up with non-executive members with no real say, but heaps of self-interest, with all the shots really being called by Lowe and other RBA inmates and to a lesser extent, the Treasury Secretary?

  5. MathiasMEMBER

    > How can inflation goals be met in a world of zero interest rates and currency devaluation?
    > Is an inflation target that excludes asset prices relevant any longer?

    Oh yeah. Im loving this. Lets kick some a$$.

    Im a patient man. Sooner or later, Labors going to have to talk about Housing and when they do, I’ll be listening ;p

    Why doesnt Labor just go and have a chat with Sustainable Australia Party ( and Macrobusiness ).

    Labor can beat around the bush but we all know SAP got it right. Labor should just adopt there policies and get on with it.

    Nobody gives a sh*t about politics anymore. They just want stuff to Work. There’s nothing uglier then a hero when your homeless and cant put food on the table. Its a time for Stability and a ‘Simple Life’.

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