Recently Glenn Stevens of the Reserve Bank of Australia (RBA) appears to be taking credit for everything from the robust nature of the Australian economy to the mining boom. What he seems to have forgotten or is not willing to admit, is that the RBA has made a number of forecasts over the last couple of years that have been very wrong and probably raised interest rates too high in 2008.
Glenn Stevens and the RBA are not miners, farmers, factory workers, bankers etc. and if they were to suddenly vanish from the planet earth the economy would continue to tick over. In fact I would go so far as to suggest the the RBA is probably overstaffed and most of it’s interest rate decisions could be made by a computer programme and Mr Ed, the talking horse.
But this does not stop Glenn Stevens taking credit for all that is good with the Australian economy and deftly buck passing any of the nasties onto overseas market forces, government policies or the bogeyman.
Let’s go back and look at some of the comments made by the Governor of the RBA in his address to Australian Business in London on the 18th January, 2008 entitled: “Economic Prospects in 2008: An Antipodean View” to see how he was reading the tea leaves back then.
If we read the text of his speech on this occasion it is clear that in early 2008 Glenn Stevens and the RBA did not predict the major turmoil seen in the financial markets that resulted from the collapse of Lehman Brothers, and in fact he anticipated that the fallout from the global financial crisis on the Australian economy would be limited. At the address in London Glenn Stevens stated:
“Based on what we can see at present, my judgement is that the direct financial effects of the global turmoil on Australia are likely to be confined mainly to the impact on borrowing costs of the liquidity squeeze of recent months, which has pushed up the cost of wholesale finance a bit in addition to the effects of monetary policy changes. Taking into account the strength of demand, this increase in borrowing costs does not seem likely to pose a particular problem for the economy as a whole. There is no evidence, moreover, of a ‘credit crunch’ in the domestic financial sector. On the contrary, thus far the core elements of the domestic system have stepped into the potential gap left by the capital markets.”
Well Glenn your judgement was wrong! There was (and still is) a credit crunch and the increased cost of borrowing funds from overseas sources sent a number of Australian companies and property developers bankrupt. The RBA hardly helped the situation by raising interest rates locally as well!
But like all good economists he gave himself the ultimate get out of jail card when he went on to say:
“All this could change if the credit tightening abroad takes a serious turn further for the worse. But failing that, over the horizon of the next year or so, the main further impact of international events is likely to be through two channels. The first is the effects on global economic growth, and particularly the growth of China. The second channel is the potential intangible effect on business confidence, which could operate to the extent that Australian business leaders take a cue from their counterparts in the US and Europe. In both cases there is, thus far, no evidence of any significant impact, but it may be too soon to see it yet.”
So the RBA Governor gave himself room to wiggle out of his assessment of the situation by saying “all this could change” but unfortunately he went on to talk about business confidence and once again he was way off the mark. Business confidence in Australia did collapse and much of this was due to Rudd & Swan talking up inflation , then doing a sharp 180 degree turn and scaring everyone with their talk about a national economic emergency.
Perhaps readers think I am being unfair in that nobody really saw problems on the horizon for the Australian economy? But in February 2008, just after I started this blog I wrote:
“we must rely on the RBA making the right calls regarding interest rates at the right time and my guess is they have overplayed their hand. I might be wrong and probably am, but I think they are putting the economic brakes on too hard and as a result they are setting up the Australian economy for a fall.”
I then observed that:
“The recent business sentiment survey indicates most companies are not very optimistic about the next 6-12 months so the economy might already been on the downward slope. This combined with a post Olympics downturn in China would really cause some pain and this is what I expect to happen.”
I saw things differently from the RBA because I was watching the data coming out of Japan and could see clearly that the U.S. economy was sliding backwards. The reason for this is because as an investor I prefer to look at real time business and economic data rather than forecasts. The RBA may have faith in their economic models and forecasts but I don’t, and if the RBA was truly interested in self improvement they would be having a hard look at why they were so wrong in their outlook for 2008.
I also did not anticipate how the world financial markets would spiral downwards after the events of September 2008, but I have no problem admitting this as opposed to using my selective memory to claim I have some unique insight into the global economy.
We all make mistakes and when it comes to forecasts it is hard to get them correct with any degree of accuracy. I am not suggesting the Governor of the RBA has to be infallible, but I do suggest that he needs to admit when the RBA gets things wrong and take a few hits when his own predictions turn out to be off the mark.
The problem with the attitude being displayed by Glenn Stevens and the RBA is that they seem unwilling to admit when they make errors and this means they are unlikely to be learning from earlier mistakes. As time passes they simply tweak their speeches to suit their preferred reality; one that has them as the masters of the Australian economy who have almost single-handedly been responsible for creating the robust nature that it is currently displays.
I wonder when the mainstream media are going to contemplate these questions:
- If the RBA did not raise rates as far as they did in 2008 could the Australian economy have avoided contraction?
- Did the actions of the RBA result in Australian economy cooling by too much and thus trigger the wasteful spending of the Rudd Government?
I will not hold my breath waiting for the above questions to be discussed in any detail by most of our finance and business journalists as they generally suck in and regurgitate anything the Reserve Bank feeds them. However in my view the RBA has become politically tainted and I now treat their forecasts and outlooks accordingly.
The danger now is that the RBA will repeat their erros of 2008 by this time around raising rates too early and by too much thus holding back the growth of the Australian economy. If this was to happen as demand for our exports slid then Australia could easily slip back into recession.