The latest Jolly Swagman podcast is highly recommended. Ex RBA chief argues that the current RBA’s approach of targeting the wealth effect as a channel for monetary policy is “least attractive channel” because it risks igniting housing booms.
Ian Macfarlane was Governor of the Reserve Bank of Australia from 1996 to 2006. He is the author of The Search For Stability and Ten Remarkable Australians.
– Nonsense. Here we are fed the usual lies.
1) A central bank can’t target anything. The only thing it can do is “create money out of thin air”, like any other (commercial) bank. But McFarlane seems to be perpetuating the same eternal lie.
2) A central bank can only increase the excess reserves of the commercial banks. To whom the commercial banks lend (with money created out of thin air) is the decision of those commercial banks themselves. And in the last say 25 years australian commercial banks lend heavily for australian property. Because it was the australian public that decided they wanted to speculate / invest in australian property in the last say 25 year. So, it’s the public that determines in what asset class is being invested / speculated. Not the banks or the RBA.
3) The RBA was “leaning against the wind” by raising rates in 2003 ? Nonsense. It was “Mr Market” that pushed rates higher and the RBA was forced to follow. Short term rates go up in a boom and down in a “recession”, when the boom is over. But this is something people like McFarlane, Powell and Lowe won’t admit in a Thousand years. It would take away the magic of central banking. And we all know “the RBA is brain dead” (says Steve Keen).
4) John Adams thinks that Australia is running a massive “Foreign Currency Risk”. McFarlane here points out that (australian) banks Always have swapped their debts (denominated in e.g. USD) into debt denominated into AUD. This means that “foreign currency risk” of the banks is ZERO. Just listen to the podcast.
5) What one shouldn’t underestimate is the impact of (what I call) “the psychology of rising and falling (asset) prices”. As long as the price of e.g. properties goes up, banks are more willing to lend and specufestors are more willing to borrow money for that property. They all get greedy. But when the price of e.g. a property is falling then banks are less willing to lend and specufestors are less willing to borrow. Then all get fearfull. See e.g the current run up in the stockmarket. Investors are getting greedy again. It’s the same “psychology of rising and falling (asset) prices” but this time in stocks.