What Are These Central Banks Up To?

It's funny how in such a supposedly egalitarian country as Australia we pay so much deference to public servants.  We pay them a lot (much more than their overseas counterparts), we give them a lot of power, and perhaps most important of all, we hardly ever question what they do.

The attitude of politicians, the business community, and most of the media to Philip Lowe, the governor of the Reserve Bank of Australia, proves the point.  You could make a good argument that Lowe is the most powerful person in the country.

The Reserve Bank board of which he's the chairman sets the most important price in the economy — the price of money, his independence is enshrined in law, and while his decisions are scrutinised they're seldom questioned or criticised.

Heretical questions that no one dare ask these days such as why so many economists think it's a bad idea if the government decided the price of pencils but they happily accept a government committee setting the price of money, and why should there even be a central bank in the first place can be left to one side for the moment.

The question for the next few years ahead will be what checks and balances will apply to Lowe and the Reserve Bank as they contemplate what in Lowe's recent words to the House of Representatives Standing Committee on Economics are "extreme unconventional policy measures".

It's understandable that if you are going to have a central bank and if you are going to give it a mandate to ensure financial stability the bank should be independent of politics.  But very few people, at least in this country — compared to America where the actions of the Federal Reserve are the subject of regular Twitter commentary by the President — have asked what happens if the Reserve Bank was ever to adopt "extreme unconventional policy measures".

SHOCK AND AWE

While Lowe hasn't ruled out "extreme unconventional policy measures" at least he hasn't yet embraced them as his counterpart across the Tasman Sea appears to have.  Last week the Reserve Bank of New Zealand cut interest rates by 50 basis points to a record low of 1.0 per cent in a move described as "Shock and awe Kiwi style".  The decision prompted the production of a research paper from New Zealand's leading think tank, the New Zealand Initiative, entitled The Unreserved Bank of New Zealand — Why unorthodox monetary policy needs boundaries.  While there are differences between the responsibilities of the two countries' central banks, nearly everything the paper says about the Reserve Bank of New Zealand applies to Australia.  It should be compulsory reading, not just for every member of Parliament, but also for all nine members of the Reserve Bank Board.

A key argument of the paper is that such policy could result in the Reserve Bank of New Zealand undertaking essentially political functions.

"Under quantitative easing, the RBNZ could become an alternative to Inland Revenue [ATO] and the Treasury as it would provide (indirect) funding to the government by purchasing government bonds.  If it went beyond that and started purchasing corporate assets, it could also morph into something resembling a sovereign wealth fund.  If it chose to fund projects of a certain nature (say bonds with an infrastructure background or related to specific policy areas), it would again be more akin to Treasury."

Lowe's remark that in the face of persistently weak economic and wages growth, "We [the RBA] would need to look at all monetary options, fiscal options and structural options", has passed with barely a murmur.  Maybe it's because in Australia we think that producing helicopter money or implementing quantitative easing is what other countries do.

When self-funded retirees are getting less than 2 per cent interest on their term deposits because of the decisions of the Reserve Bank they've got no one to complain to.

In 2009 when the Rudd government handed out $900 in cash to taxpayers to stave off the global financial crisis it was the decision of a democratically-elected government ultimately accountable to the electorate.

If ever the Reserve Bank does implement "extreme unconventional policy measures", to whom Lowe will be accountable for his success or failure is unclear.