Paul Keating says the RBA is not doing what is needed to stop the COVID recession worsening
Paul Keating has accused the Reserve Bank of conservatism, laziness and failing to do what is necessary to head off the worst of the coronavirus-induced economic crisis.
In a letter distributed to the media, the former prime minister said the RBA should be funding the “mountainous sums” of government spending required to support the corona-ravaged economy, and it should not rule out the policy option of buying government bonds directly from Treasury to do so.
He argued the central bank ought to remember its role is to ensure “full employment”, and in an economic emergency that means breaking with orthodoxy and “doing what is sensibly required” to achieve that goal.
Mr Keating — who was treasurer during Australia’s last recession in the early 1990s — said it would make Federal Government’s funding task “much easier and support for the country better” if the Reserve Bank bought whatever level of government debt was necessary and locked it away on its balance sheet.
He criticised RBA officials for lacking the courage to break with economic orthodoxy to allow monetary financing of deficit spending, or to even support a larger traditional bond-buying program, and said they are too concerned about what other central bankers would think if Australia went down that path.
‘High priests of the incremental’
The RBA’s governor, Philip Lowe, has repeatedly dismissed calls this year for the bank to purchase government bonds directly from Treasury to finance the government’s deficit spending.
“It has to be remembered, these are the high priests of the incremental,” Mr Keating commented.
“Making absolutely certain that not a Bank toe will be put across the line of central bank orthodoxy.
“Certainly not buying bonds directly from Treasury — wash your mouth out on that one — what would they say about us at the annual Bank for International Settlements meeting in Basel?
“Not even ambitiously buying sufficient bonds in the secondary market, like the European Central Bank or the Bank of Japan.
“The Reserve Bank might do as it was set up to do — help the Government. Be a utility. Shoulder the load. And in a super-low inflationary world, that load is funding fiscal policy. Mountainous sums of it.”
Mr Keating’s decision to weigh into the debate about Australia’s handling of the coronavirus recession was prompted by a speech on Tuesday by RBA Deputy Governor Guy Debelle.
Dr Debelle hinted that the RBA would be willing to cut the official interest rate slightly, from 0.25 per cent to possibly 0.1 per cent, to add a bit more stimulus to the economy.
Government ‘able to finance itself’
Mr Keating was scathing of the RBA’s conservative incrementalism, arguing bolder policy moves are required to confront the worst economic crisis in 90 years.
He said there was no reason why the RBA should not adopt monetary financing of deficit spending.
In arguing this, Mr Keating appears to be siding with proponents of a school of economic thought called Modern Monetary Theory who have been arguing there is no need for the RBA to buy bonds from the secondary market to fund government spending measures.
They argue the RBA has the power to create money itself to finance the Federal Government’s stimulus spending by purchasing the bonds directly from Treasury.
But it is a policy option the RBA has dismissed.
“I want to make it very clear that monetary financing of fiscal policy is not an option under consideration in Australia, nor does it need to be,” RBA governor Philip Lowe said in July.
“The Australian Government is able to finance itself in the bond market, and it can do so on very favourable terms.”
At that time, Dr Lowe said the bank would continue its long-running practice of buying government bonds from the so-called “secondary market” — i.e. from financial institutions that had already bought them from the government — to ensure there is some separation between Treasury’s issuance of bonds and the Reserve Bank’s funding of government spending.
That means it has been waiting for Treasury to sell new Commonwealth Government bonds (via the Office of Australian Financial Management) to private banks, pension funds, and insurance companies, before then buying those same bonds from those private entities at an agreed interest rate.
That traditional practice of “raising money” from the secondary market for government spending is what has led to the explosion of Commonwealth Government debt this year as it seeks to fund the nation’s largest ever stimulus program.
‘RBA is invariably late to the party’
Mr Keating said the RBA’s unwillingness to pursue unorthodox economic policies during an unprecedented economic crisis proved it was once again risking making a recession worse.
“In my office during the latter part of the 1980s and the early 1990s, we had a nickname for the Reserve Bank — the Reverse Bank,” Mr Keating said.
“And what earned the Bank that nickname was that the Bank was too slow lifting interest rates in the face of the commercial bank credit bubble of the late 1980s and too slow in getting rates down in the early 1990s.
“This gave Australia a deeper recession that it would have otherwise had, notwithstanding that the commercial banks’ crazy credit behaviour had to be stopped and gains against inflation had to be protected.
“As Treasurer, I personally wore the cost of the Bank’s indolence in the task of smashing inflation — is it turned out, an outcome which gave Australia 30 years of low inflationary growth thereafter.
“But the Reserve Bank is now having another one of its dalliances with indolence.
“Knowing full well that monetary policy can now no longer add to nominal demand — something that now, only fiscal policy is capable of doing — the Reserve Bank is way behind the curve in supporting the Government in its budgetary funding measures.”
He said the RBA showed some “unlikely form” earlier this year when it introduced a bold 0.25 per cent yield target for three-year Treasury bonds and a low interest loan facility for banks, but it failed to follow those measures with further innovations and the direct consequence was hundreds of thousands of Australians had suffered needless financial harm this year.
“But now, after 600,000 superannuation accounts were cleared and closed down, with 500,000 of those belonging to people under 35 — a withdrawal of $35 billion in personal savings — and further demands arising from the employment hiatus in Victoria, the Deputy Governor of the Bank, Guy Debelle, yesterday strolled out with debating points about why further RBA action might be contemplated,” Mr Keating said in reference to Mr Debelle’s speech to the Australian Industry Group on Tuesday.
“As history has shown, when a real crisis is upon us the RBA is invariably late to the party. And so it is again.”