Club Troppo

After reading this Australian article, I looked for the relevant US diplomatic cable, largely because the paper cannot be assumed to quote things accurately or in context. I found something else that worried me though. Here’s two excerpts, with my emphasis.

Although the Board had intended to wait a few months for the new expansionary rate to flow through the economy, [Reserve Bank Assistant Governor for Economics] Edey said the Board agreed that further deterioration in the global economy merited another aggressive cut in February. The Board decided to pause on cuts in March, in part to give the Reserve Bank enough ammunition down the road in case the economy spirals into deeper recession.

And later

Steven Kennedy, Chief Macroeconomic Advisor to PM Kevin Rudd, told us April 1 that he and his Treasury Department colleagues are increasingly frustrated with the RBA. Praising the Bank’s initial response to the global financial crisis, Kennedy said that the RBA’s aggressive approach helped reassure markets and complimented the Government’s stimulus packages. He complained that the RBA is “schizophrenic” in that the Banks simultaneously believes that Australia will be hit hard but that it should hold off on further rate cuts in order to “keep its powder dry” in case things get worse.

This is what disturbs me. I hope it’s just the diplomats projecting a typically American love of guns and thus gun analogies onto others. When it comes to monetary policy “keeping your powder dry” doesn’t make any sense.

Instead lets use a differing analogy of a central banker driving a car along an undulating road. Her task is to keep to a constant speed. In Australia under inflation targeting this speed is 2-3% CPI growth, but it could be steady growth in nominal GDP if you are so inclined. At boom times the car is heading down a hill and goes faster, with higher credit growth and inflation. The banker eases off the throttle. In bad times the car hits a climb and starts to slow, and the banker puts her foot down in order to maintain a constant speed. On any given slope there is an appropriate level of throttle for the desired speed.

Now imagine the car has hit a steep slope. She obviously responds by opening up the throttle. But she is unsure about whether the slope will get steeper still. Should she refrain from pushing the accelerator too much so she can push it harder if the slope does get steeper? Should she be saving accelerator just in case?

That wouldn’t make any sense. If the road gets steeper it won’t matter if she is able to push the pedal down from a higher starting point. If a pedal to the floor can’t make the car go fast enough up the hill, it doesn’t matter how early or late you pushed it there.

Similarly, there is no model I know of that would explain why, with a given macroeconomic climate, a given interest rate would be more stimulative provided it had followed a drop. If things got worse, why would you get better credit growth, consumption and investment by dropping the cash rate from, say, 2% to 1% than you would have seen if it was already 1%. Given the macroeconomic climate, it is either sufficient or it is not – whether people borrow, lend or invest enough at that rate isn’t related to whether it was a big change from last month. (Continued)

On any view yesterday’s High Court decision holding the Malaysia Solution to be unlawful is a smashing blow to the Gillard government and an equally smashing win for asylum seekers and the people smugglers who capitalise on their desperation.  In the slightly longer term it also poses a thorny policy question for the now inevitable Abbott Coalition government.  The decision may well render any renewal of the Howard government’s Pacific Solution effectively pointless.

By a 6:1 majority (Heydon J dissenting) the Court held that the Minister lacked legal power to send the 42 asylum seekers (and by extension any future asylum seekers) to Malaysia for refugee assessment and processing. It was a decision based on administrative law and statutory interpretation grounds rather than constitutional law issues.  Four Justices (Gummow, Hayne, Crennan and Bell JJ) adopted asylum seeker senior counsel Debbie Mortimer’s most audacious position, namely that:

1. the question of whether Malaysia was a “safe third country” for the purpose of the Migration Act 1958 was a “jurisdictional fact” i.e. a factual situation which must exist prior to any power in the Minister to send asylum seekers there for assessment;
2. this jurisdictional fact could not exist unless the country concerned was legally bound under its own domestic laws and/or international law to provide protection in a Refugee Convention sense, to provide proper assessment of refugee claims, and to protect basic human rights standards for all returned asylum seekers; and
3. the existence of the  jurisdictional fact of safety also requires that the actual practices and procedures of the country in question are effective in securing that safety.

Factual preconditions 1 and 2 to Ministerial power at least did not exist in Malaysia, and indeed the Minister did not even claim that they did (nor could he given that the Arrangement with Malaysia expressly stated that it was not legally binding on Malaysia).

French CJ and Kiefel J denied that the factors above could be regarded as jurisdictional facts, but held that nevertheless their absence meant that the Minister had made a “jurisdictional error of law”  in concluding that Malaysia was a safe third country.  He had misconceived the legal question he was required to address, namely whether Malaysia could be regarded in law as a safe third country.  At least as the issues and reasoning were applied in this case, it made no real difference whether the Minister’s error was classified as one  of fundamental fact or of law.

The Court also held for the asylum seekers on the guardianship issue relating to unaccompanied minors, but that was almost irrelevant given the major premise.

The big long term question is whether the Court’s decision renders any plausibly deterrent form of offshore processing effectively impossible in future.  Gummow, Hayne, Crennan and Bell JJ adverted expressly to the Howard government’s Pacific Solution:

(Continued)