One of the more bizarre moments in recent economic history occurred yesterday, when a couple of mild-mannered, understated econocrats provided the most articulate argument we have heard for quite a while for the country and its business leaders to indulge in a bit of risk-taking.
In their regular appearance before the House of Representatives Standing Committee on Economics yesterday in Brisbane, Reserve Bank Governor Glenn Stevens, and his deputy, Phil Lowe, dwelt on the need for greater risk-taking by Australian business. Stevens had bemoaned the lack of “animal spirits” in the economy earlier in the year and he returned to that theme yesterday, telling the Committee that monetary easing had done all it could to fuel growth in Australia and help engineer the transition away from reliance on mining investment:
“I think we need this environment where there is more confidence to move ahead. I cannot make that happen. I have allowed the horse to come to the water of cheap funding. I cannot make it drink. I think it is a question for legislatures, governments and political leadership on all sides to think about what conduct, what measures and what ways of doing things help to create that confidence, though I am not pretending that you have a magic wand, either… You can’t make people be confident, I certainly can’t make them, and it isn’t that I’m unwilling to consider lower rates.”
But it was Lowe who best articulated an economic vision for Australia (as Michael Pascoe observed at Fairfax). Lowe was almost passionate about painting his picture of the Australian economy in the future.”[M]onetary policy can’t be the engine of growth in the economy,” he told the Committee. “We can help smooth out the fluctuations, we can’t in the end drive the overall growth in the economy.”
“Australia is going to be a high wages, high-productivity, high-value added economy — that’s where we want to be, that’s where we could be, that’s where we should be. If we’re going to find ourselves in that position and sustain ourselves there, then people need to be able to take risks, they need to be able to be rewarded for risks and we need to innovate to find new ways of doing things better…risk taking, education, infrastructure, they’re the things that are going to help us be a high wage, high productivity, high value added economy.”
Contrast their urgings with the talk from the government (until a few days ago) of budget and debt emergencies — the need to cut, the need to punish the less well off. And consider the recent “national champions” effort of new Business Council head, Catherine Livingstone, arguing that government policy should create national champions and set a national direction for economic growth. That it should be bureaucrats, rather than politicians (and politicians close to business, better yet) or business itself outlining the most coherent economic vision says much for the standard of public economic debate currently.
Stevens’ comments on the Australian dollar were also noteworthy. He made this observation:
“There was a point when the exchange rate was much higher than it is now where I thought about it seriously, but then the exchange rate went down and we have not revisited that level. I am, I suppose, trying to strike the right balance between a decision which has certain risks with public money and the needs of the economy, and weighing those things. I think that is what we have to try to do. What we have said is we certainly do not rule out the possibility of intervention under some circumstances.”
Stevens could be referring to July and August 2011, when the currency was around US$1.09 and over US$1.10 for several days and looked like staying there; or from mid 2013 to around last December when the currency remained above 92-93 US cents, occasionally pushing above 96 US cents, despite several attempts of trying to talk the currency down.
According to Stevens’ repeated statements, central bank governors don’t normally talk about intervening to change the value of the dollar — it is supposed to be a surprise, and you only get one chance to have an impact before the market (with much more money) starts calling the bank’s bluff. In an interview with The Australian Financial Review late last year, Stevens nominated 85 US cents as an appropriate price level for the currency, rather than above 90 US cents or parity. The dollar dipped accordingly — though only briefly.
But as Stevens noted to the committee, he doesn’t much like the idea of direct intervention — when the RBA has to sell high yielding Australian dollars for a lower yielding foreign asset like the US dollar, thereby using public (taxpayers’) money. He seemed to be indicating that he came very close to doing just that, stepping into the currency market to try drive the dollar lower.
The last intervention by the RBA was during the height of the GFC when the value of the currency plunged sharply in a couple of days. The RBA bought and sold dollars on the way down to try and slow the currency’s plunge and avoid a nasty and damaging overshoot to well below 50 US cents. Yesterday’s remarks reflect how seriously the Bank takes the ongoing issue of what it sees as an overvalued dollar.