Australian Reserve Bank blames others for its own folly
Gerard Jackson
Does the Reserve Bank know what it is doing? If Reserve Bank governor Ian Macfarlane's comments are anything to go by then the answer is no. This became apparent when Macfarlane recently warned banks that they risked financial strife if they continued to lower their lending standards.
Macfarlane is not alone in his fears. John Laker, a former central banker and now chairman of the Australian Prudential Regulation Authority, warned earlier of the number of bad loans that were being made.
Macfarlane and Laker have been alarmed by the fact that household debt has reached record levels.
The debt problem has been building up for sometime. For instance, by March 2003 household debt was more than 400 per cent its 1991 level. April 2003 to April 2004 saw the highest annual growth in household debt ever recorded. This included a 19 per cent growth rate. Until June this year household debt was rising by 17 per cent a year.
No wonder real estate values nearly doubled in the four years to 2003.
The response of Macfarlane and Laker to this situation showed that they are at a complete loss to explain it. All they can do is blame the banks. The real culprit, however, is the Reserve.
Now these gentlemen are urging the banks to curb their lending. In other words, keep their excess deposits. But these deposits have been created by the Reserve acting through the banking system.
What has happened is that the Reserve has used the fractional banking system to recklessly expand credit. That is to say it is running a dangerously loose monetary policy. (Most people do not realise that credit unbacked by actual savings is part of the money supply).
Therefore the country is faced by an irresponsible monetary policy. If Macfarlane doubts this perhaps he should take a look at his own bank's money supply figures. From January 1996 to September this year currency grew by 71 per cent, bank deposits by 105 per cent and M1 by 97.4 per cent.
These figures clearly show that there has been a rapid monetary expansion. So how is it that Macfarlane and Laker completely miss the ramifications of the Reserve's loose monetary policy? Is it because they have no real idea of how changes in the money supply, particularly credit expansion, work their way through the economy? It certainly looks that way.
As for our economic commentariat, the less said the better.
Last August I wrote: "Until greater monetary understanding is acquired, we can still expect Ian Macfarlane to repeatedly issue vain warnings about the growth of household debt and the need to curb it." So what does Macfarlane do? He issues more vain warnings.
Sooner or later the country is going to have to pay for the Reserve's monetary incompetence. What that means for a Liberal government remains to be seen.
Gerard Jackson is Brookes' economics editor
BrookesNews.Com
Monday 29 November 2004