Friday, August 22, 2014

Atlas Stevens while Abbott shrugs?

Stephen Koukoulas is on his hobby horse again about Glenn Stevens and the RBA not being loose enough with monetary policy. In his unofficial role as Australia's (partial) answer to Paul Krugman, he's bashing Stevens about refusing to lower interest rates in the face of a complete lack of interest from the fiscal side in doing the heavy lifting to rescue certain parts of the economy from the depredations of a globalised market.
In these circumstances with below trend growth, a high and rising unemployment rate, a currency that is hurting the traded goods sector and risk still a dirty word, why not cut interest rates?
The obvious answer is that there's not all that many basis points to go before we hit the zero lower bound of 0% interest rates, and as can be seen from the current US and European live experiments, that's not a position that you want to be in. The Kouk wants 50 points to take the official cash rate from its already historic low of 2.5% down to 2%, but it's rare for that to be the extent of a shift in policy. Once the RBA starts moving in one direction, it's difficult to reverse momentum.

No, just because other Western countries have made the mistake of locking in procyclical fiscal austerity and relying on the steaming new theory of market monetarism, doesn't mean we should follow suit. This is about as low as we want interest rates. As Greg Jericho says:
Perhaps we are asking too much of monetary policy.
Jericho goes through the arguments for and against macroprudential tools, as a way to lower interest rates without encouraging a bubbly investment in housing instead of support for solid, growth-producing business. He ends up cautiously endorsing the use of those tools, presumably in conjunction with further easing.

My thoughts go back to one of the key reasons for the housing boom in America that led to the GFC: government intervening in the housing market to incentivise financial institutions to provide "sub-prime" home loans to people who often couldn't afford to pay them off. Now, I know the situation here is a lot different. The thread I see running though is the law of unintended consequences. We just don't know how those macroprudential tools would work in practice.

Perhaps more importantly, we DO know how well fiscal stimulus works, as we have decades of empirical data of successes to show for it, most recently in 2008/09. Expecting Glenn Stevens to be Atlas while Tony Abbott shrugs is too much to ask. The pressure should be on the government, not the wonks. We know what to do, the elites have to be told.

1 comment:

  1. what the hell did the US government do with sub-prime loans?

    you are not conflating sub-prime loans with the voluntary CRA loans are you ?

    The Fed a few times and every Regional Fed has debunked that malarky.

    The government needs some sort of plan to get to trend Nominal GDP growth but it doesn't seem to have one.

    In the worst news my cricket team isn't at 11 players as yet!!