Michael Pascoe: Conspiracy or stuff up, the RBA review is a crock

There is a view held the review lacked any evidence that its recommendations would be beneficial, writes Michael Pascoe.

There is a view held the review lacked any evidence that its recommendations would be beneficial, writes Michael Pascoe. Photo: TND/Getty

The Greens, Peter Costello, Paul Keating, Bernie Fraser and Ian Macfarlane make for an unlikely alliance, but the second-rate RBA review has made them one.

They are united in opposing one of the review’s sillier recommendations – that the government surrender its circumscribed power to veto an RBA interest rate decision.

Ditching the veto was dressed up as re-inforcing the RBA’s independence when the review’s other 50 recommendations – all adopted with indecent haste and apparently little thought by federal Treasurer Dr Jim Chalmers – effectively white ant it.

Senate inquiry exposes review

The poor quality of the review is belatedly being exposed by a Senate inquiry into the proposed changes to the Reserve Bank Act.

On Thursday, former treasurer Peter Costello and former RBA governors Fraser and Macfarlane all dissed dropping the veto. Paul Keating has previously spoken against it, the Greens are fighting it and some Liberal backbenchers also are opposed while shadow treasurer Angus Taylor, unsurprisingly, doesn’t know what he thinks.

At this stage, Treasurer Chalmers can only see the politics, telling the Australian Financial Review that he will respond in due course and:

“It’s disappointing but not surprising to see the Liberals team up with the Greens to play politics with the independent RBA.”

The veto power, Section 11 of the Act, is not about politics but the sovereignty of the government and having a mechanism to resolve disagreement between the government and the RBA, as Costello, Fraser and Macfarlane variously told the Senate committee.

Section 11 would be “valuable in resolving a once or twice a century situation where there was a major irreconcilable difference between the bank and the government”, Macfarlane said.

A safety valve

It was a safety valve, said Fraser, who has the distinction of being the RBA governor and Treasury secretary.

“Simply dumping Section 11 would do nothing to enhance the bank’s independence,” he said. “Rather, the likelihood is that, sooner or later, the vacuum would be filled with alternative processes aimed at clipping the bank’s independence.”

Costello said something very similar, that there would be the risk in a future emergency that Parliament could legislate something even more interventionist.

“Does Parliament want to maintain some sovereignty in this area or not?” he asked.

Macfarlane has previously written that the review recommendations greatly weaken the authority of the governor and the bank, and surround monetary policymaking in elaborate and time-consuming processes.

“The review was carried out by three economists,” he wrote in the AFR. “As others have observed, it is not surprising they recommend increasing the number of economists in monetary policy decisions. Not only will there be more economists, but more boards, more board papers, more levels of management, more staff and more public pronouncements.”

Costello and Fraser on Thursday joined Macfarlane in criticising the establishment of a new and separate board to set monetary policy, Fraser saying he was concerned about a committee of “super nerds”.

There is a view held more widely that the review simply lacked any evidence of its recommendations being beneficial – thus a grab-bag of bits and pieces of other central bank practices without any reason to think they would provide better outcomes.

Best performance

As I’ve heard it expressed, if you wanted to review the RBA to get better outcomes, you might start by surveying the world’s central banks to find which had recorded the best performance over, say, the past three decades since inflation targeting has been a thing and then copy what that central bank had been doing.

But the central bank you would be copying would be the RBA.

That has been overlooked in the media hysteria about unpopular RBA decisions and mistakes, urged on by a chorus of local economists who would perhaps like to have more relevance than they do – generally economists without power seeking profile.

Having been part of the RBA commentary industry for more than four decades, I’m as happy as anyone to throw stones at the institution when I think it’s wrong  – as all institutions are from time to time – but the review process, its membership, its odd recommendations and Chalmers’ rush to adopt them holus bolus add up to a very strange episode in the bank’s history.

Those given to conspiracy theories might think Jim Chalmers was settling a score on behalf of his hero, Paul Keating, who allegedly has never forgiven the RBA for waiting until after the 1996 election to start cutting interest rates. Or that the institution that is the Treasury saw an opportunity to stitch up the RBA when Treasury itself was in urgent need of a serious review given the decade of damaging policy it has been party to.

Simple stuff up more likely

But like all such things, a simple stuff up is more likely.

It’s probably just a coincidence that a review set up by Treasury did not consider Treasury’s role in inflation management failures or how a smart nation might better deal with inflation rather than relying on the third-rate policy of bashing one section of society with interest rates.

It’s also no doubt a coincidence that while the review window dresses RBA independence with its Section 11 recommendation, it maintains the distinctly odd lack of independence inherent in keeping the Treasury Secretary on the RBA board as a voting member, the same person who is named first on a three-person panel that is supposed to select Bernie Fraser’s “super nerds”.

The RBA’s meek acceptance of the review also speaks to independence, Michele Bullock only dares going as far as saying she was “agnostic” about Section 11.

And the funniest thing about the recommendation to scrap the veto is that there is international experience demonstrating the wisdom of having a Section 11 procedure when a central bank is at total loggerheads with the government.

The Coyne Affair, as it became known, saw the Bank of Canada’s governor lose his job in 1961 and, subsequently, BOC legislation changed to include provisions rather like our RBA’s Section 11.

The funny bit is that the RBA review chair was a former BOC deputy governor, who might be expected to well know her old bank’s history.

And here we are with Jim Chalmers proposing to take Australia back to the situation Canada was in six decades ago.

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