RBA must revisit monetary policy or end with a bust
letter published in The AFR, 6 April 2009
Although Christopher Joye draws on hindsight in his rather sweeping conclusions about the possible analyses and policy tools available to pre-empt financial crises, he does raise issues that support the need for a major review of monetary policy ("Popping asset bubbles just isn't on for the RBA", Opinion, April 3 ).
Indeed, it is little short of astonishing that, despite the evident failure of monetary policy overseas, the G20 seems to have overlooked it almost completely. Were they advised to do so by central banks that were policy failures?
As to Australia, I suggested during the 1980s surge in credit growth that greater regard should be given to changes in asset prices and I have never been wholly satisfied with the Reserve Bank's standard answer viz "we take them into account in our analyses". Contrary to Mr Joye, however, I should have thought that the bank has "clarified" that it has not been targeting asset prices.
Whether or not a targeting of asset prices warrants more attention, any review of policy surely needs to address the difficult issue of changes over time in human nature.
There is a long history of swings in attitudes from optimism to pessimism, often "inspired" by governments, that result in changes in risk behaviour: our most recent swing of optimism was reflected in the boom in investment in commodity production.
If monetary policy does not pay sufficient regard to such swings, it is very likely that we will end up with a "bust" - and high unemployment. That is what happened in the 1980s and what is happening now.
Can our Australian central bank escape criticism when it is evident that the major problem originated overseas? I suggest that a glance at the growth in monetary aggregates and in household debt (as a % of disposable income) from about 2003 on should have been sounding alarm bells and pushing interest rates up faster and to higher levels before 2008. Comparing those growth rates with the growth in nominal GDP shows inherent inflationary influences and inherent high debt influences.
Of course, Milton Friedman's hope that we could determine the "appropriate" rate of growth in monetary growth has not been realised and nobody knows what the appropriate rate is. But a common sense look at the circumstances suggests that interest rates should have been raised earlier and, important as they are, that too much emphasis was placed on movements in consumer prices.
Although this time around Australian policy has performed better, the operation of our monetary policy is not blameless and requires review.
Des Moore
Director, Institute for Private Enterprise
South Yarra Vic