The RBA, one of Australia’s finest institutions could do a little better – by not doing silly things.

I have a running conversation with Henry Ergas in which I argue that one could get a long way in economics just by not doing silly things – ie there are plenty of $100 bills on the pavement.  He doesn’t seem to agree.  But here’s a $100 bill on the pavement. From today’s column.

AT NEARLY midnight on April 15 100 years ago, Frederick Fleet peered nervously into inky, icy darkness. As the cold white glow of the iceberg loomed out of the black, he sounded the alarm. But the Titanic turned slowly …

You’ve probably heard the economy likened to an ocean liner. Turning the rudder requires time to take full effect. But somehow wishing themselves into a world more suited to this circumstance, our central bank moves the rudder in slow motion. Perhaps they think it reassures the passengers. But I know of no economic model that would justify such action when the passengers’ safety is paramount rather than their comfort.

This macro-policy slow motion intensified the great recession of the early 1990s. Interest rates had been too high for too long. But we only know that now with hindsight. However, we knew some things then – with foresight. As the official rate was cut from 18 per cent to 17 per cent in early 1990, I remember asking, with this official acknowledgement that high rates had done their job of slowing the economy, why weren’t we returning to normal settings quickly? Turned out it was a good question.

Ever since, the bank has been more responsive. And though there have been the inevitable errors involved in having an imperfect crystal ball, our Reserve Bank has shown excellent judgment in setting rates. Yet somehow it’s still got that ocean liner analogy backwards.

For instance, the bank’s October 2008 1 percentage point cut was seen as aggressive at the time. Yet by then Lehman Bros had collapsed and the global financial system was being held together with duct tape. We already knew that the cash rate should be much lower than the 7 per cent it was. The iceberg was unmistakable. Each successive board meeting cut by a similar amount for another five months.

And as it sets our economic sails for a future it can only imperfectly know, Her Majesty’s Steamship RBA tames any anxiety it or we might feel about our inevitable ignorance by keeping things shipshape. The board meets to set policy on the same day each month, come rain, shine, snow or sleet. Except in January, during the silly season.

Now I don’t begrudge them a holiday, but sometimes the silly season gets serious. As it did in the summer of 2008-09 when the world wondered if that duct tape would hold as one financial market after another seized up. Some UK banks came within hours of closing ATMs. What would have happened then? But this wasn’t enough to shake the RBA’s clockwork schedule.

Rather, they explained, this gave them more confidence in cutting rates by as much as 1 point in December, since they’d be on hols till February. They didn’t explain why they didn’t cut more, or why they couldn’t hold a January meeting or depute a subcommittee to make appropriate decisions if necessary. Seriously – would we tolerate this kind of thing from firemen or ambos, or even on the wharves?

Last week the bank cut rates citing “modest domestic growth”. On the succeeding two days the Bureau of Statistics released the national accounts and employment data respectively. Both suggested that domestic growth was anything but modest.

To paraphrase Lady Bracknell, to make an important decision a day before a regular data release discredits your assumptions, may be regarded as a misfortune. To make it two days before two data releases doubly discredit your assumptions, looks like carelessness. The RBA’s board members are busy people, but mightn’t they rearrange their meetings to minimise these problems?

Even if board members require a rigid monthly timetable, the RBA’s current schedule seems almost wilfully perverse – exquisitely mistimed. Four of its 11 interest rate decisions each year are made three months after the previous quarterly national accounts release and the day before the next one. Just moving its meetings to the best possible time of each month – probably late in the second week – would ensure that all meetings were held within a week or so of quarterly national accounts and employment data releases.

But at a time when the words “whole of government” fall from official lips like dying leaves in a Canberra autumn, would it be asking too much for the bank and the ABS to co-ordinate their activities?

As Peter Costello sternly took to warning us before the 2007 election, our economy turns over more than $1 trillion annually. It’s more than $1.3 trillion today. So if a poorly informed bank board decision cost us 0.1 per cent of one year’s economic growth, that’s more than $1 billion, some of it gone forever. That’s too high a price for a work-to-rule mentality at the more genteel end of our labour market.

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22 Responses to The RBA, one of Australia’s finest institutions could do a little better – by not doing silly things.

  1. Tel says:

    But somehow wishing themselves into a world more suited to this circumstance, our central bank moves the rudder in slow motion. Perhaps they think it reassures the passengers. But I know of no economic model that would justify such action when the passengers’ safety is paramount rather than their comfort.

    You presume that the size and location of the iceberg are known to the helmsman, I would argue that we have only vague knowledge of such things at best. For that matter, you presume there’s only one iceberg.

    Anyhow, the metaphore of a national economy as one big ocean liner with rigid-hull sounds like a centrally planned economy. A capitalist economy is more like a fleet of ships of all different sizes, not all going in exactly the same direction at any one time, but primarily clustered together with stragglers dotted around. Let’s suppose for argument sake that these ships do sincerely try to follow the general directions given to them, if you issue instructions too rapidly and demand dramatic changes then the fleet simply breaks up, and loses cohesion.

    • John Bennetts says:

      No, Tel.

      I interpreted what I read as knowing with certainty that, when said iceberg looms into view in the shape of quarterly figures, it will do so one or two days after the RBA meeting. Every time.

      Hence, the recommendation to steer clear of the iceberg, to act with more knowledge and thus greater chance of success.

      Maybe success isn’t as deeply etched into the collective psyche of RBA Board members as is the need for a convivial get-together on Melbourne Cup Days.

  2. JB Cairns says:

    You are being a tad harsh.

    Yes agreed on the recession we had to have but I can tell you it as very lonely telling all and sundry there was going to be a bad recession back then as no-one wanted to listen.

    you must have missed Glen Stevens’ reason for not wanting to reduce rates to 1% back in the GFC however monetary policy was always going to be a bit player in avoiding a recession and then getting a viable recovery.
    An anecdote will suffice. The biggest Bank appointed a lending manager for Queensland. within this first week he was told no loans would be written at all because of the problems of funding.
    Loans would go to first home buyers then homebuyers and then businesses.
    Banks were super-cautious then.

    The Real growth rate of 4.3% was great BUT nominal growth was a tad weak. We cannot expect deflation to boost real growth much longer so the interest rate cuts were not wrong on tuesday. There are more to come depending on nominal GDP.

    • Nicholas Gruen says:

      OK JB, now let me get this straight. To the extent that the Bank thinks that its interest rate changes won’t have much effect it should scale them back?

      On the wisdom of the cut last Tuesday, I didn’t say it was unjustified – just that one of the reasons for doing it had been discredited. Of course it may be ‘recredited’ again with further data and revisions. My comments went to the reasoning of the Bank. Where are those comments wrong? Do you think, in hindsight – or perhaps just imagining yourself making the decision in foresight – that it would have been better for the Bank to make its decision on the day it did or two days later?

  3. derrida derider says:

    I don’t get your point, JB. If banks are refusing to lend that strengthens, not weakens, the case for large and rapid reductions in interest rates. In such circumstances easy money may not be sufficient to deal with the problem, but it is necessary.

    Nicholas’ point is that if you have a view on where the level of interest rates should be in current circumstances then set them at that level straight away. Your view may, in the nature of things, be wrong but there is nothing to be gained and potentially a lot be lost by keeping rates at a level you must now believe is inappropriate just so you can move “cautiously”.

    And yes, I should have thought the RBA Board would set its meeting dates primarily with an eye to ABS releases. If you’re on the RBA board then such meetings should simply override anything else in your diary. We shouldn’t need to make that an explicit condition of appointment, but if it is necessary then let’s do so.

  4. JB Cairns says:

    DD,
    during the GFC banks simply could get funding from O/S even with a government guarantee.

    without funding you cannot lend. If you are very scared you lend to sectors with very little risk.

    monetary policy is impaired so you must go mostly with fiscal policy.

    Think of it being a qualified form of a liquidity trap.

  5. JB Cairns says:

    No Nick,

    it is just there is little point in going to 1% if banks can’t get funding to lend.

    As for the last cut it didn’t matter when the meeting was. nominal GDP is weak and didn’t make the cut wrong.

  6. Nicholas Gruen says:

    So I did have it straight. Banks weren’t going to respond to the cut with more borrowing, so if the right level for rates is a 3% cash rate, we should cut to 6% and review in a month (unless it’s a December cut, in which case we should review in two months?).

  7. JB Cairns says:

    No there is nothing wrong with 3% it is just monetary policy was never going to be the main policy that helped us against the GFC.

    There is a reason why it was called a freezing of credit markets.

    look at the interest rate sectors. why did they react so differently this time s in the past?

    You are still focusing much too much on the present real GDP numbers and not on the nominal ones as well Nick.

    We are still not in normal times.

  8. Nicholas Gruen says:

    You’re right JB. I’m not focusing on the current numbers at all. I’m just focusing on when they come out. Whatever decision it made, if you think it would have been better for the Bank to decide interest rates for the next month on Tuesday, then that’s position. If you think it would have been better to decide after two more crucial bits of information came out, I guess you agree with me.

    On the 2008 situation, you haven’t really responded to DD’s and my point.

  9. JB Cairns says:

    I’m sorry Nicholas but I thought I had.

    you can have lower interest rates and I was all in favour of that at the time but it wasn’t easy money as the Banks lacked the funds to lend as they usually do.

    They were not refusing to lend. They were also quite risk averse.

    This is unusual and only happens in extreme situations.

    hence monetary policy was impaired and we needed fiscal policy.

  10. Nicholas Gruen says:

    JB,

    This is getting pretty vexing. I didn’t say anything about fiscal policy. Why do I have to be dragged into some set piece battle about fiscal versus monetary policy when I’ve said nothing about fiscal policy. (For the record I happen to agree that we needed fiscal stimulus in 2008-9 and I’ve said that on lots of occasions.) I’m saying monetary policy was poorly set in the months I’ve mentioned for the reason I’ve mentioned. If you’d like to address that, feel free, but it’s got nothing to do with fiscal policy. To uphold your argument you have to believe that it was better for the RBA to cut rates from 7 to 6 per cent in October than from 7 to – say 4 per cent. Now let’s grant that banking was not working well and that it wouldn’t have led to much more lending. Let’s say it wouldn’t have led to any more lending. But it would have led to lower costs for numerous households and firms. Why wouldn’t that have been a good thing? (And if you don’t think it would have led to lower costs for firms – and think that the banks would have passed none of it on to business then drop it and focus on households.)

  11. JB Cairns says:

    Nicholas,

    I didn’t say you said anything about Fiscasl policy.

    the RBA didn’t know about the GFC ubtil it started in September when Lehman Bros was tghrown to the wolves.
    They knew a tidal wave coming then.
    It seems to me they cut at the right amounts at the right time

  12. sdfc says:

    I don’t know why you are quibbling Nicholas. Policy was successful. Unemployment peaking at 5.9% during the worst global downturn since the 30s was an extraordinary result.

  13. JMB says:

    For what it is worth, I’m with Nicholas.

    His argument was essentially that the RBA chooses to meet on Melbourne Cup Day and subsequent first Tuesdays of the months, thus ensuring that they are working from data which is a month old and about to be supoerseded within a day or two.

    How smart is that?

    Nicholas’s suggestion that the RBA meetings, if pushed back half a week would enable the RBA Board to make its decision based on current information, rather than stuff which is 4 weeks old seems pretty self-evidently reasonable. This is in no way connected to historical perspectives and debates about monetary Vs fiscal policy.

  14. Pedro says:

    Yes, set the meetings so they follow the data releases with a bit of time for digestion and market reaction. The point of the RBA movements is to manage expectations so you should have the best idea what they are and GDP numbers impact expectations.

    Homer, since when did the GDP numbers become real and not nominal?

    Since we can print our own money there is more flexibility for domestic lending if the RBA really wants to support it.

  15. JB Cairns says:

    I think the real criticism of the RBA can be of over-estimating mining boom mark2.
    monetary policy was too tight.

    The RBA is basing decisions on the future not what is currently happening so delaying a meeting is silly.

    Pedro , the national accounts have both nominal and real aggregates.

    The black background of the last few days was a definite put-off

  16. Alex Roberts says:

    Nicholas – not to argue with your case, but if the meetings were moved once, could the precedent become a hindrance? As the news cycle can get quite excited about things, might there not be calls that the Reserve needs to meet more often, change when they are meeting or have extraordinary meetings if it happened once? Is it too hard too imagine certain interests calling for an extraordinary/rescheduled meeting every time some dramatic numbers came out? Tradition provides the institution with a powerful defence to this.

  17. Nicholas Gruen says:

    Alex, I don’t know if I saw your comment when it was written but you do seem to be a bundle of nerves on behalf of the Bank. It shouldn’t move the date to a more suitable date because that would be – well moving the date. And that would create a precedent and people would call for them to change the date (which they’re not doing much of now – except for me I guess.) So responding on the merits leads to a slippery slope in which people make non-meritorious suggestions.

    Anyway, the way I think of things, the circumstance you set out where people argue for things and those they’re arguing about must decide how they respond on the merits? I’m looking for the downside here? What is the alternative to that world?

  18. Alex Roberts says:

    Nicholas – if you’re arguing for a permanent one-off shift of when the bank meets within the month, then sure. I was just thinking that if there was any fluidity in when the bank considers things, then it would have ramifications for the confidence cycle (which doesn’t appear to be the most rational thing). (Well, it was 4 years ago – I think that was what I was thinking…)

  19. Nicholas Gruen says:

    Methinks you see (correction saw) a problem that wasn’t there. Any problems should be solved on their merits. The dates are, as they now stand, optimally bad. Have a policy of moving the standard dates to plausibly good days. And yes, no harm in occasionally meeting at other times if, on a quick recky, the benefits outweigh the costs.

    Going on hols for two months from Dec to Feb, I’d suggest is defs a bad idea at any time but it was a stupendously bad idea in 2008-9.

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