The predictable consequence of the Government intervening in the financial market to guarantee loans and deposits — that those not afforded the same guarantee are competitively disadvantaged — didn’t take long to emerge.
And, to resort to footballing parlance, full credit to the Opposition. Julie Bishop raised the impact of the guarantee on commercial paper last Tuesday in Parliament. Wayne Swan ignored the question. Malcolm Turnbull called a press conference at lunchtime to press the issue, demanding to know the RBA’s advice to the government. Question Time today might have its first real bite for a while, especially since Turnbull is on familiar territory. Expect it to occupy a larger role in Question Time today.
This is not exactly a barbecue stopper of an issue. Try explaining to your average punter that the guarantee is punishing investment banks and they’re likely to think even more highly of the Government for doing it. The Government will still get all of the credit for interest rate falls without any of the political downside that should flow from bad, panicky policy. With any luck the Government won’t heap bad policy on bad policy by extending the guarantee further.
But that’s the problem with government interventions, whether they’re sovereign guarantees or economic stimulus packages. Those who miss out on the benefits complain long and loud. At some point brokers and investment analysts will start pointing out that the guarantee is causing a flow of money out of equities, depriving Australian companies of much-needed capital.
The logic of the stimulus package — it behoves all of us to resist using the Government’s carefully-contrived and possibly market-tested names for these things — is the orthodoxy that Reserve Bank interest rate cuts will take 12-18 months to flow through to the real economy. This was certainly the case in years gone by, but the public is now far more literate about interest rates and inflation now, and far more responsive. They understand the signals the Reserve Bank was sending with repeated small increases in rates last year, and the message behind the 1% cut. They get the message from the media, not when they eventually go to the bank and decide they can’t afford that home loan they were hoping for.
Maybe I’m talking rubbish — unlikely to be the first or last time — but think about this. The RBA minutes from the Board meeting that led to the 1% cut refer, amidst the welter of disastrous economic and financial news, to smaller sample sizes and greater uncertainty in retail sales figures. The impact of the Government’s efficiency dividend cuts on the quality of ABS data have been discussed previously in Crikey and elsewhere. But there’s a bigger data problem. The financial crisis has been moving so quickly data is out of date before it can be assessed and used as a basis for policy.
“The Board’s discussion of international economic conditions commenced with a review of the latest data for the United States, which … predated the latest bout of financial market turmoil…” the Bank’s minutes noted. And, later, “the paper prepared for the Board recommended a large reduction in the cash rate, of at least 50 basis points, with the amount to be subject to review in light of any events occurring between the preparation of the paper and the time of the meeting. In the event, the recommendation put to the Board at the meeting was for a reduction of 100 basis points…”
The Reserve Bank’s usual mechanism for avoiding being too dependent on data is its direct liaison with businesses, ramped up since the mid-1990s when it copped criticism for being out of touch, and increased as it embarked on its most recent round of rate rises. Now events are moving even too quickly for that sort of input, so fast a board paper is out of date before the relevant meeting.
The Prime Minister has been making a virtue of not waiting for the data to come in before deciding on what to do about the economic effects of the financial crisis. We were too busy applauding him to notice the irony of self-professed advocate of evidence-based policy doing that. But the RBA had done the same on 7 October. “In view of the latest economic and financial market developments, members judged that the material change to the balance of risks surrounding the outlook for growth and inflation in Australia meant that a significantly less restrictive stance of monetary policy was now appropriate.” That’s bureaucrat speak for “we don’t know how bad things are but they’re pretty bad.”
Now is probably not the time to indulge in optimistic speculation, but what happens if we move just as quickly out of the financial crisis and out of an economic slowdown? Will the Government have blown $10.4b of the surplus for nothing? Maybe we should hope so.