By Colin Chapman
Unwittingly, or perhaps wittingly, Reserve Bank of Australia governor Glenn Stevens has thrown a spanner into the works of Australia’s combustible election campaign.
He has criticised those who suggest a further reduction in interest rates, rather than a more disciplined approach to public spending, would better serve the public interest in securing higher growth and a stronger economy.
In a lengthy and thoughtful speech in New York on April 20 (Australian time), Stevens cautioned against using ‘helicopter money’ to rekindle growth. Helicopter money has become a fashionable term in international financial circles and is seen by some as a way to address the lacklustre economic performance of many countries, including Australia, that has been evident since the global financial crisis of the last decade. In Australian parlance, it means pork-barrelling (which is likely to be a part of all major parties’ campaigns as we prepare for a federal election on July 2).
Stevens’ speech was headed, with classic understatement, ‘Notes on the Current Situation’. Quite brutally for someone in his position who prefers not to dabble in politics, the RBA chief cited some alternative issues to address:
- in some jurisdictions, inadequately capitalised banks
- over-leveraged companies or households
- poor incentives for risk-taking of the ‘right’ kind
- practices that unnecessarily impede productivity, or that slow down the reallocation of capital from old industries to new ones.
Stevens said, “If we could engender a reasonable sense that future income prospects are brighter, that there is a good return on innovation and ‘real economy’ risk taking, and so on, then people might use low-cost funding for more productive purposes than just bidding up the prices of existing assets. Over time, the return on financial instruments could rise in line with returns on the real economy. Pension funds and insurers would be better able to meet their obligations. Governments would more easily service their debts.
“Citizens, having had some explanations as to why changes were necessary, would, in time, see some gains in their way of life, or at least some threats to their living standards abate. They would see less resort to very unorthodox policies, because there would be less need for them. And I can’t help thinking they would feel better about that.”