Everyone has a view on the Reserve Bank.
The government has even announced a review of the RBA.
Seems we love a scapegoat… and especially now we have the benefit of hindsight!
Do I seem sceptical?
Okay, maybe a little.
But here's why:
You know all of those 'end of season reviews' that losing sporting clubs do?
They're just as useless.
Because 'after the fact' analysis is just that – after the fact.
One: The decision makers didn't know, in advance, how things were going to turn out.
Two: We tend to use hindsight with an 'of course that was going to happen' perspective. As if there were no other options at the time.
We know, now, that inflation is high, and systemic.
At the time, central bankers thought (hoped?) it would be 'transitory' and relatively limited.
Were they wrong? Yep.
Was that inevitable? Not a chance!
There's an old joke that the 'doom and gloom' set predicted 9 of the last 2 recessions.
That is, eventually they got it 'right', because they just said the same thing over and over again, and eventually got lucky.
See, in a parallel universe somewhere, inflation was transitory and limited.
In that universe, maybe Russia didn't invade Ukraine. Maybe there were no COVID lockdowns in China. Perhaps the supply chains aren't gummed up there.
In our universe, those things did happen – but we only know that with the benefit of hindsight.
Now, I'm no apologist for the RBA.
They got it wrong.
There's no hiding from that. Nor should there be.
But what is a review going to do?
The people appointed to the review will do a stand-up job. They'll provide a sober and thoughtful analysis.
And then?
And then they'll say 'this is what we think you should do'.
Not 'here's the objective, evidence-based prescription that will surely make things better'.
Not because they're not capable.
But because there is no objective, testable truth when it comes to the imperfect, squishy thing we call economic and monetary policy.
And because if you had 100 different central bankers, conducting 100 different reviews of the RBA, you'd probably get 25 – 40 different sets of recommendations, some that directly contradicted others.
Economists and central bankers don't have access to the unalienable truth.
They have theories, informed by evidence, experience and ideology. And given no two people have the same mix of those things, they'll end up in different places.
Imagine asking one Liberal, one Labor and one Greens MP to review the Nationals.
Imagine asking one employer, one unionist and one bureaucrat to review the minimum wage.
Imagine asking one Jew, one Muslim and one Buddhist to review the Anglican Church.
Now change that last group to a Pentecostal, an Atheist and a Sikh.
Do you reckon those reviews would make the same recommendations?
Yes, those are extreme examples.
But my point is that there is no objective reality – no scientific discovery or testable hypothesis – just a range of opinions, held by serious, well-informed, but ultimately subjective people.
I've seen it on Twitter, among serious, thoughtful economists, who just completely disagree on what interest rates should be, for example.
None of them are stupid, ill-informed or reckless. They just have different views on how the various stakeholders should be prioritised, what the role of interest rates (versus other policy tools) should be, and what will happen if rates are changed.
So, yes, I'm in favour of the RBA learning some lessons from the last couple of years… but I'm far from sure the 'review' will help us uncover some yet-unknown sacred truth, or that any recommendations will necessarily make for better decisions from our central bank.
But… I do have two very simple suggestions.
First, I tweeted this in April last year:
"I don't do predictions as such, but call this one a long bet:
The RBA's change in course from 'acting in advance' to 'waiting for sustained data' will come to be seen as a mistake."
Waiting until inflation arrived, and was entrenched, before acting was a monumental mistake.
And an own-goal.
They were so scared of moving too early that they abandoned their pre-existing policy of being prepared, in favour of 'reacting'.
As I said, a monumental mistake.
Second, they allowed themselves to be misquoted by almost everyone.
The soundbite most people heard was 'Rates won't move until 2024'.
What the RBA actually said was 'Rates won't move until circumstances warrant it… and we think those circumstances will come about in 2024'.
Again, they were wrong, but that's life – predictions are inherently impossible.
The bigger sin was in letting people believe that they'd made some sort of promise about 2024.
Once they were misreported, they should have been faster and more vocal in clearing it up.
But third, here's the typically-governmental missed opportunity: While they're reviewing the RBA, they're not reviewing other agencies or the government itself.
It's like the old 'let's have a tax review, but exclude consideration of changes to the GST'.
While we're looking at the RBA – with precisely one policy tool: interest rates – the government isn't looking at the completely-entwined impact of fiscal policy (tax and spending decisions), or the role of the banking regulator in changing bank lending rules – or the banks themselves.
COVID relief actually boosted household incomes, for example.
Negative gearing and capital gains taxes policies impact(ed) property prices.
Bank lending buffers were lowered at the same time as rates were at emergency lows – greatly boosting borrowing capacity and pushing up house prices.
(When banks lend money, they start with the current interest rate, then add a 'buffer' to make sure the loan can be still repaid if rates go up.)
So, fourth, I'd institute a policy of raising the lending buffer when rates fall (limiting over-borrowing) and lowering it when rates rise (limiting the damage done by rising rates).
That way higher rates will slow the economy (as intended) without crushing house prices, and lower rates will stimulate the economy (as intended) without creating a house price bubble.
Makes sense, no?
But back to my point: all of these different considerations, and we're just reviewing the central bank?
To reuse one of my favourite analogies, the RBA is in a biplane, with a joystick (interest rates) that goes up, down, or level.
The federal government (of either and both stripes) is in a state-of-the-art fighter jet, with knobs, dials, buttons, levers, guidance systems, radio contact with the ground and more weapons than you can poke a stick at.
And the RBA is the (only) one being reviewed?
Can you imagine reviewing the Air Force's air capability but limiting yourself to the WWII biplane fleet and ignoring the modern fighter aircraft?
Me either.
I hope the review of the RBA is useful. I hope the outcomes improve policy.
But until the government includes all policy tools in a review, it's likely to be an opinion-driven sideshow, unfortunately.
Meanwhile, real policy change remains a pipe-dream.
Treasurer, over to you.
Have a great weekend!
Fool on!
