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RBA avoidance of future moral hazards
letter published in The Australian Financial Review, 30 October 2009

Your Notebook reports an important conclusion in the Financial Times (27 October) that “the era when central banks could target inflation and assume what was happening in asset and credit markets was of no concern of theirs is over”.

This raises the question of why monetary policies failed to prevent the global financial crisis, a question that does not seem to have been addressed at meetings of the G20 and which seems also to have been neglected within the countries involved. With hindsight it can now be seen that although over the years leading up to 2008 inflation was constrained successfully, central banks (including the Reserve Bank) allowed the private sector to increase debt at a much faster rate than GDP (in nominal terms) and for non-productive purposes. This suggests that there is a serious “gap” in the policy objectives adopted by central banks and a need for a major public inquiry into the operating objectives for monetary policy.

This need is highlighted by your report of assistant RBA governor Edey’s comment that banks should not in future financial crises count on a government bail-out (“RBA may not offer helping hand again”, October 29).

Such avoidance of moral hazard situations must surely be a major objective from now onwards. But the question of how exactly it is to be achieved needs to be laid out in well-defined terms.

Des Moore
Director, Institute for Private Enterprise
South Yarra Vic

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