Decisions made by the Reserve Bank have impacted the lives of millions.
Concerned about the plummeting affordability of housing, Cherish Kuehlmann joined others in protesting outside the bank’s headquarters in Sydney.
“The interest rates are directly an attack on working-class families and poor workers and students who cannot afford to buy a house right now, let alone rent,” she says.
“Philip Lowe says that profitable banks are good for Australia, it’s good for us. But I think we have to ask good for who?”
Ms Kuehlmann isn’t alone in asking questions about the Reserve Bank and the leadership of its governor, Philip Lowe.
Misleading guidance that interest rates would stay near zero until 2024, a failure to keep inflation within the set target range, and the cumulative impact of nine interest rate hikes in less than a year have brought a keen focus on Australia’s central bank.
A review commissioned by Treasurer Jim Chalmers, due to report to him by the end of March, might provide some answers – and recommend changes.
‘Quietly catastrophic’ impact
Economists are looking forward to the review of the Reserve Bank, but some fear it will not recommend sufficiently bold changes.
Nicholas Gruen, one of Australia’s most respected economists, said we should be thinking deeply about the RBA’s place in Australia’s larger economic architecture.
He said it was fine to argue about who should be sitting on the RBA board, but there were much larger economic issues at stake for Australian society.
For one, he said our “central banking system”, which encompasses the nation’s major economic institutions, could vastly improve the material lives of Australians if it revived the ethos of the post-war years that prioritised making housing affordable at mass scale.
He said the “massive financialisation of houses” in the past 30 years had been “quietly catastrophic” and it was undermining the RBA’s official objective to improve the economic prosperity and welfare of all Australians.
“It’s quite interesting that the central banking system, and that could include the Australian Prudential Regulation Authority (APRA), have interested themselves in greenhouse risk, and I think that’s fine,” Dr Gruen told the ABC.
“But I think there would be nothing wrong with the central banking system saying to itself, and saying publicly, ‘The world is a much [more] socially healthy place when houses cost three times average earnings – not six times, seven times, eight times family earnings – and we’re heading back into an Edwardian class structure.'”
“I regard that as quietly catastrophic.”
Review due soon
The RBA review is due to be handed to the Treasurer by 31 March.
According to former RBA economists who have publicly backed the review, it may end up recommending changes to the way the bank communicates policy changes, the composition of the Reserve Bank board, and whether it continues in its role of setting the cash rate or a panel of expert economists takes over.
The rate is used by banks as a benchmark for lending, meaning its rises and falls are largely mirrored in the variable rates on home loans.
But those changes will leave Australia’s larger economic architecture broadly the same, with the RBA left alone to continue targeting inflation while other economic institutions are left untouched.
However, working within those strict confines, economists argue there are still a lot of ways the RBA can be improved.
Peter Tulip, chief economist of the Centre for Independent Studies, a libertarian think tank, said the RBA was too insular.
“There’s not enough deliberate internal deliberation,” he said.
“There’s not enough scrutiny given to the decisions either internally or externally.
“And a whole conjunction of almost cultural problems like that lead to repeated mistakes.”
Dr Tulip said the way in which the RBA had approached inflation exposed its flaws.
The bank has tried to keep inflation within a 2 to 3 per cent inflation target. Before the pandemic, it was under, slowing wage growth.
Now inflation is above 7 per cent and the blunt instrument of raising interest rates is raining pain on borrowers.
“There have been some suggestions that we should fiddle with the target or finesse it a bit,” Dr Tulip said.
“That’s a bit like a cricket coach telling a bowler which stump to aim at when the bowler can’t even land the ball on the pitch.
“The Reserve Bank has shown a lack of interest or ability in getting anywhere near its current targets. Fine-tuning them is just beside the point.”
Broader argument
Sally McManus from the Australian Council of Trade Unions wants to see the board – and the RBA –broaden out what it knows about wages.
“The RBA has been wrong, wrong, wrong,” she said of the central bank’s forecasts about how much more workers would be paid.
The secretary of the ACTU, the nation’s peak body for unions, continued the sporting theme, likening the RBA to a darts player not even hitting the board.
“They’re so sort of stuck in a 1970s way of understanding how Australia works,” she argued, pointing to massive changes in the labour market around unions, industrial laws and collective bargaining.
“Wages have been depressed because workers’ bargaining power has been depressed. [The RBA] constantly talk about a ‘wage-price spiral’ where this was never on the cards.
“They have a blind spot. They don’t understand, in the 2020s, how wages work in Australia. And that’s a big, big problem when you’re making such large decisions that affect everyone.”
Who’s on board?
Former RBA economist Dr Zac Gross, now a lecturer in economics at Monash University, wants to see changes to the composition of the board.
Its key job is setting rates – a key monetary policy – but it eschews experts in the field for eminent businesspeople.
“Monetary policy is an incredibly complex and specific topic,” he said.
“We should have our smartest minds on macro-economics, financial markets and monetary policy make the decisions about how the Reserve Bank of Australia sets interest rates.”
The board has nine members: two from the bank, the secretary to the Treasury, an academic and five accomplished businesspeople, two of whom also hold positions with the Centre for Independent Studies.
The office of the Treasurer has confirmed that Reserve Bank board members Mark Barnaba and Wendy Craik will not be reappointed when their terms expire this year, the start of a renewal of the make-up of the key group, although there is no indication at this stage whether or not they will be replaced by other businesspeople.
Steven Hamilton, a former Treasury staffer, said the board could not provide sufficient challenge to the recommendations of RBA staff when it made decisions.
“We have one economist on the Reserve Bank board today and one academic economist,” he argued.
“The five years before that, we didn’t have anyone who had a strong expert background in economics, and I think what that means is the board, who is the body that’s meant to take decisions, is too likely to defer to the governor.”
He would like to see that change.
“In other countries, it’s very standard for the board to be filled with experts in a position to scrutinise the advice. And, in fact, dissenting votes are very common.”
All three – Dr Tulip, Dr Gross and Dr Hamilton – would like businesspeople kicked off the RBA board and replaced with experts in monetary policy, arguing that setting interest rates requires technocratic expertise.
“They’re clever, intelligent people,” Dr Tulip said, “but they’re not trained in macro-economics or in monetary policy.
“It’s like having businessmen on the High Court or [vaccine safety body] ATAGI or other government instrumentalities. These are technical decisions that need to be made by experts.”
Voice of dissent
But that is not a uniform view.
Dr Gruen has his own take on that argument.
“I was persuaded many years ago by Ted Evans, who was secretary to the Treasury and therefore an RBA board member, that the tradition we have in Australia of [having] someone from the union movement and some businesses on the board wasn’t such a bad thing to do,” he told the ABC.
“Because [the RBA board] needs to show some social intelligence as well as economic expertise.
“One needs to be able to convey the idea that it has some degree of representativeness of the people, of different kinds of people in Australia.”
He said having a room full of monetary policy experts could end up pushing the RBA board even further away from common people.
“Experts get themselves all tangled up in their own kind of groupthink, and we’ve got plenty of evidence of that,” he argued.
“There are certain areas, like forecasting, where I can prove to you that economic expertise doesn’t add very much.
“The future is unknowable. So much is unknowable, in fact, that thinking that we have the very best economists gives us a false confidence that they know more than they do.
“So again, that’s another reason for saying this may not be necessarily a step forward.”
Dr Gruen said it puts things into perspective to think of the social and economic costs of Australia’s modern macro-economic policy settings.
“One of the costs is the massive financialisation of houses,” he said.
“A lot of the cost of houses is simply funding the debt, and that’s dead money because it’s like everyone standing up at the football to get a better view.
“There are all of those kinds of arguments for saying that these highly regulatory arrangements we had, highly interventionist arrangements, after the [Second World] War, they were probably inefficient in all kinds of ways, and in ways that we could improve, but there was a basic wisdom there, and a basic efficiency there, in saying that getting every Australian house buyer to compete against every other Australian house buyer is a rule for standing room when we have room for seats.
“That’s a trick we’ve played on ourselves over the last generation and it is, as I said, quietly catastrophic in my view.”
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