RBA Governor to governments: Get to work

There’s only so much a central bank can do and then it is up to government to step up, to clear productivity blockages and invest heavily in infrastructure to revive economic growth.

Well, that’s pretty much what Reserve Bank governor Glenn Stevens told a New York conference on Tuesday night.

What Stevens had to say about retirees’ nest eggs being threatened by very low returns received most media attention, but his warning to politicians is arguably more important for us.

The governor was explicitly addressing the international economic problem of stubbornly low growth, not the Australian situation, but there are nonetheless domestic messages in what he had to say. Maybe he didn’t want to be too blatant about it at this stage of the election campaign.

Stevens is due to finish up as governor this year, having served during a period of unprecedented global economic turmoil, never mind the strains and successes of the coming and going of our biggest resources boom since the original gold rush. On his watch, the RBA has managed the monetary policy highwire act remarkably well.

Some critics, with the benefit of hindsight and no responsibility, will always find something to carp about, but if there was a Central Banker of the Year award, Stevens would have it sitting in his pool room.

Also read: RBA's Stevens says limits to rates policy

Which is a long way of saying that he’s certainly earned the right to be taken very seriously indeed. His latest speech was given with the backdrop of some folk starting to explore the idea of central banks showering the people with “helicopter money” – simply sending out cheques. Stevens was having none of it, turning instead to what governments should really be doing now:

“Desperate times call for desperate measures, perhaps. Are we that desperate? (to implement helicopter money)

“Before we even got close to that point, one would have thought that for many governments today there must still be projects of an infrastructure kind that would, through conventional fiscal operations at current bond rates, offer returns comfortably above their cost of funding. Helicopter money is surely not needed in these cases.

“Questions may arise, in some jurisdictions at least, in the minds of citizens about the ‘soundness’ of such conventional policies. But if such questions arise about conventional fiscal actions, it seems unlikely that adding central bank financing to the mix would allay them.”

In other words, central banks are pretty much at the limit of what they can do. It makes much more sense for governments to borrow and invest in infrastructure that will pay for itself in time.

Also read: RBA's minutes weighs on Aust bonds

While Stevens is a cautious soul, as central bankers are wont to be, he remains a fundamental optimist about human beings and what we are capable of.

As already noted, his speech was specifically aimed at the wider world, a world awash with trillions of dollars sitting in bonds paying negative interest rates. It's a weird place.

In that world, retirees’ nest eggs are indeed under threat. The “paradox of thrift” is working overtime – one person saving is a good thing, but when everyone saves, economies slow and atrophy.

We are fortunate in Australia that we haven’t fallen that low. The cheer squad forever barracking for another interest rate cut should be careful about what they wish for – it’s actually a good thing for money to have a price. And it remains possible to invest and obtain a reasonable return here, as long as you look beyond fixed interest.

The plea for government to invest in the nation nonetheless applies. It’s been a feature of a couple of speeches by Stevens’ deputy, Phil Lowe – the man who should take over from him.

Now we just need politicians prepared to take that good advice.

 

Michael Pascoe is one of Australia's most respected finance and economics commentators with over four decades in newspaper, radio, television and online journalism. He regularly appears on Channel 7's Sunrise and news programs and is a regular conference speaker, MC and facilitator.