Congratulations, Glenn Stevens, for preparing us for bold rate hikes. According to reports, “Reserve Bank governor Glenn Stevens says it would be a mistake to be too timid to raise interest rates in response to a brighter economy.” With appropriate modesty, Henry notes this was one of the themes in his advice to Stevens and his board on the day of their most recent meeting.
“I interpret the speed and size of the rate cuts from October last year as showing a new predilection for decisive monetary policy action. But it is now, during the recovery, that we shall discover if there has been a highly desirable move toward more decisive action in recovery as well as scary downturns.”
The second theme was the need to take asset inflation into the central bank’s target, and here support has come from a more international source — Jasper McMahon of the Financial Times.
McMahon comes at the issue from a broader perspective than Henry, though consistent with our regular fulminations against a narrow focus on goods and service inflation and apparent neglect of excess lending fueling persistent asset inflation and regular asset bubbles.
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He says: “One of the early conclusions on financial regulation is that a piece of the jigsaw has been missing: the ‘macro-prudential’ function. Lord Turner identified this in his report for the UK, as did Jacques de Larosière in his for the European Union. Someone has to be looking not at the risks run by any specific institution, but at the systemic risks that arise because of the pattern of actions taken across groups of institutions”.
The conclusion questions the current but quite new approach with simple objectives and operational independence for central banks.
“… if the central bank’s goals are seen to be complex, requiring it to make trade-offs between competing political objectives, politicians may find it more difficult to keep their hands off the monetary controls”.
No wonder, as McMahon says, central bankers have been rather quiet about this. Henry also commends John Gapper in the FT for asking what is to be done with a problem such as Goldman (Sachs). Goldman was “wounded” by Matt Taibbi, a Rolling Stone writer, who described it as “a giant vampire squid wrapped around the face of humanity”.
This, Gapper said, had “mischaracterised” Goldman.
But there is indeed a problem. “From being a small Wall Street firm in which its employees risked all their own wealth by placing it in a partnership, it has become a large, Federal Reserve supervised bank with public shareholders and employees that expect to be richly rewarded each year”.
Like other big US banks, Goldman’s results have bounced back, despite needing massive bailouts during the worst of the global financial crisis. Clearly there is a big issue, or several big issues. Regulators have a lot to do to redesign the framework and bankers have a lot to do to restore their reputations.
Gapper will devote his column next week to the question of “how do you solve a problem like Goldman Sachs?” As a case study for a large problem, this is not to be missed.