The Oz Banana Republic – Take a bow RBA ‘independence’

This comment was made at Macrobusiness  (link may be locked – but there is a free trial available)

Considering the role the RBA board accepted as the de facto manager of the Australian economy they had a responsibility to state that managing the economy with monetary policy was driving the problem.

1. A mountain of household debt – 35-40% funded off shore.

2. Increasing amounts of govt debt bought off shore.

3. A bloated currency.

4. The cherry on top – Excessive reliance on assets sales and sales of non renewable resources.

All they had to do was  point out that the model for economic management was not working and was creating major imbalances in the economy.

Had they done that we may have been having this debate across the country back in the early 2000s.

Now the argument may be that although independent the RBA is still effectively a bunch of public servants and political appointees that would not say boo to a goose.

Exactly – which is why the ‘independence’ of the RBA is worse than a myth it is actually an obstacle to proper economic management and accountability for the economy.

It provides political cover for politicians who wish to outsource responsibility.

…and this


All the current debt is swapped into $AUS so the Australian banks will not Swiss banked but the terms and cost of rolling over debt are affected by the perceived risk of lending to Oz.

We already have govt guarantees to try and keep the borrowing terms for our Big 4 lower than they would otherwise be.

Likewise covered bonds were introduced to help the banks obtain lower cost funds.

As HnH notes the loss of the triple. AAA rating will start to drive up borrowing costs further.

Countries that run ongoing CADs eventually start paying more for the pleasure.

The $AUS should be and will go lower – prob to 50 cents having regard to our likely trading performance post mining boom.

The only area of disagreement between HnH and myself is quite minor (but important) and that is how to get there.

I prefer explicit controls on unproductive capital inflows introduced progressively as these will soften the exchange rate AND avoid the need to debauch monetary policy and pump up household debt. All done with govt running sufficiently large deficits (lower taxes or sound projects not pork projects or bribe welfare)to maintain money supply as endogenous money creation by the banks softens and ultimately reverses and then ceases.

HnH prefers milder regulation on unproductive capital inflows – restrictions on some types of borrowers – and lower interest rates presumably to keep other types of borrowers borrowing.

Unfortunately, neither position is favoured by the RBA, APRA or the government. They remain true believers in having as little regulation of capital – borrowing as possible. The market is perfect in their belief system.

Though the government promises about FIRB action are interesting as they are consistent with regulating unproductive capital inflows. I think that is most likely just a coincidence as Mr Robb thinks flogging off assets in $1B chunks is the best thing since sliced cheese.

… and this


“….. then all the deposit would end up back at the banks – no need for any foreign funding…..”

The deposits created by the banks when they create a loan may stay within the Australian banking system but where they are and on what terms at any particular point of time is important.

When the banks borrow off shore they are not literally – borrowing money from off shore.

What they are doing is trying to persuade foreigners to acquire local deposits and re-locate them within in the banking system to the bank that wants them on terms that the bank desires.

Foreigners see merit in this because their ‘savings’ in foreign currency pay less interest. So buying some Australian deposits and shifting them to a bank that offers them attractive terms suits them. Movements in the exchange rate may be a bonus or negative.

Our banks prefer this to trying to persuade locals to move their deposits because it costs them more to get us to do so.

The foreigners are essentially just undercutting locals in the market where banks seek people to locate a deposit with them on terms that the bank would like.

The point that HnH is making is that the banks are not borrowing in $US and then using those $US to acquire $AUS deposits. They are effectively getting someone else to acquire the $AUS deposits – and thus take the risk of currency movements.

But while that protects them from the currency movement it is not a gift – the party taking that risk charges the bank to do so. That means the banks have to pay a little bit more to have foreigners acquire and direct deposits to them.


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