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Will Glenn Stevens and the RBA ever admit they make mistakes?

August 18th, 2009 · Greg Atkinson · 8 Comments

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.”

(See: Where to for the Australian Economy?)

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:

  1. If the RBA did not raise rates as far as they did in 2008 could the Australian economy have avoided contraction?
  2. 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.

8 responses so far ↓

  • 1 Gary // Sep 4, 2009 at 8:46 am

    I think you will be waiting a long time before the RBA admits it can do any wrong.

  • 2 Greg Atkinson // Sep 10, 2009 at 8:22 am

    What worries me is that the RBA are starting to think they are masters of the universe and can do no wrong. I hope they just forget about fighting inflation for a while and just focus on growth.

  • 3 Ralph // Sep 10, 2009 at 9:25 am

    Well we’ll probably need a bit more inflation to get over the massive amounts of debt that are in the system.

  • 4 Greg Atkinson // Sep 10, 2009 at 9:42 am

    Ralph, I guess another concern I have is that the Government and RBA get out of sync. It would seem a little odd to me if the Government was pumping money into the economy and fuelling inflation while the RBA is raising rates and trying to fight inflation. But my feeling is this is what is likely to happen as the Government seems hooked on economic stimulus and show no signs of easing back on the construction of new school halls.

  • 5 Senator13 // Sep 10, 2009 at 10:00 am

    Swan talks of the need for stimulus like a drug addict needing their next hit – I think the Government is addicted…

  • 6 Greg Atkinson // Sep 10, 2009 at 10:07 am

    Well they will be addicted until after the next election. I think it is pretty clear via the line Government Ministers are taking that they will be spending for a while yet and are more focused on a second term than anything else.

    Actually a while back Barnaby Joyce asked Ken Henry a good question about debt and interest rates. He was asking basically where all the money would come from to fund all the massive debt being piled up by governments around the world and also if interest rates would rise because of the demand for all this money.

    Ken Henry basically said there was nothing to worry about.


  • 7 Senator13 // Sep 10, 2009 at 10:50 am

    Was that the same time when Ken and Glen said they were of “one voice”. Wonder if they stand by that?

  • 8 Graeme Simpson // Nov 26, 2009 at 9:31 pm

    You have raised some excellent points & certainly put a lot of thought, more importantly you have applied logical which is something that is often vacant no-matter the IQ number.

    The whole idea of central banks taking over rate settings has been a dismal failure from the start, in any company etc if you have 2 separate entities vying to control money, in this case the Fed Gov & the RBA, conflicts in direction & purpose ultimately collide which in many instances produce their own negative effects adding to existing problems thus making bad worse.
    Sure, it was probably a good idea to trial at the time but given the dismal results on numerous occasions it’s time to revert back to Gov control, after all we elect a Government to run a country so why not let it do it in its entirety & not with one arm tied behind it’s back.

    It truly worries me that we have learnt nothing from the catastrophic way the US economy has & continues to unravel, Australia seems hell bent on jumping off the same cliff. Unfortunately many Australians are believing the hype that salvation & great times are just around the corner being preached by all types of people in all types of positions BUT with one common denominator which is having a vested interest in people believing them whether it be financial political or business related.

    The very idea that Australia can prosper without the rest of the world thinking China will carry us all into the light blue yonder is a great theory but alas that’s all it is. There’s no disputing that Aust has done nicely clinging to Chinas apron thus far but to anyone who knows or understands what’s going on in China & more to the point are brewing know all too well how things do & will change sometimes in a heartbeat.
    China is still in it’s infancy with no hope of achieving the same level of existance many of us were lucky enough enough to enjoy soley by the means of cheap fossil fuels & to now expect Chinas internal demand to replace the loss of a huge slice of profits care of the US middle class spending is pie in the sky stuff to put it mildly.

    I had been(foolishly) hoping that the few credible dynamic people left in Australian politics would have shed their political parties & formed another viable political party with the priority of geting back to basics & do what needs to be done. The vast majority of voters no-matter their persuassion are sick to death of the way Aust has been governed & the attitude of politicians in general with various Governments. Something has to change & it will eventually, I just hope it can be done peacefully, if Australia ever needed a decisive grass roots political party with the credibility to win an election it is now.

    I would urge everyone who wants to know for themselves what’s going on, not just in China but in all the economies to do their own research because what I have heard that some investors have been told in order to obtain their hard earned money is straight out of fantasy land.

    For gods & your own sakes if you’re in the stock market, whether you’re a bull or a bear, a skeptic or a cynic, whatever or whoever you are make certain you have your exit strategies in place.

    Finally, believe no-one when it comes to wanting your money, we all like a good return however safety & security are especially paramount now, the world has NEVER experienced the size & scope of this fiasco EVER so no-one can tell you with any accuracy what will happen but you can bet we are all in for one hell of a ride at least, at worst heaven bloody help us. This is a serious
    situation & potentially life changing, let no-one try to convince you otherwise.

    My best to you all & good luck.

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