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  • Writer's picturePete Jonson

Saturday Sanity Break, 18 March 2017 - Monetary policy and financial stability policy

Some time ago America's monetary policy boss, Janet Yellen, changed the goalposts for American monetary and financial stability policies. I reported on June 4, 2014: 'Earlier this week, the Fed's new chief, Janet Yellen, changed the goalposts for US policy, supporting the UK, hints from Ben Bernanke and the RBA.

The FT reports: 'Federal Reserve Chair Janet Yellen speaks at the International Monetary Fund in Washington, Wednesday, July 2, 2014. Yellen said she doesn't see a need for the Fed to start raising interest rates to address the risk that extremely low rates could destabilize the financial system. 'Janet Yellen has mounted a forceful defence of the US Federal Reserve’s decision to keep monetary policy loose in the face of soaring asset prices, arguing there was no need to increase interest rates to tackle financial instability because the central bank has other tools at its disposal.

'In a clear signal of how the Fed intends to prevent a repeat of the 2008 crisis, its chairwoman suggested the central bank is more interested in having a resilient financial system that can cope when asset bubbles burst than it is in popping them through rate rises'

But here is the clincher.“I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns,” said Ms Yellen.

“That said, I do see pockets of increased risk-taking across the financial system, and an acceleration or broadening of these concerns could necessitate a more robust macroprudential approach.”

'A macroprudential approach would involve using non-monetary policy tools designed to manage the safety of the financial system as a whole'.

Now many experts are reporting that house prices in Sydney and Melbourne need to be reined in. If current bubble-like price increases persist, there will be a risk of severe reversal, perhaps sufficiently severe to produce a bad recession.

Two days ago, the RBA's Assistant Governor (Financial System) Michele Bullock made a fine speech, just under three years from Chairwoman Yellen's bold comments. Ms Bullock noted that when Prudential Supervision of Banks was split from the RBA into the APRA, the RBA retained overall responsibility for financial stability. The Bank stated that its ‘objective is to ensure that financial disturbances in any part of the financial system do not ultimately threaten the health of the economy.’ It went on to set out the foundations for financial stability: low inflation; a safe and robust payments system; efficient and smoothly functioning financial markets; and a sound framework of prudential supervision'. (Quoted from RBA's 1999 Annual Report.)

This laid down the new approach. Gradually greater reporting on Financial Stability was undertaken, and there was more analysis. The Global Financial Crisis (GFC) was a nasty surprise and economists and central bankers are still debating whether or not the world came close to a Great Depression. (Known among the cognoscenti as "It".)

Ms Bullock says nothing about this scary debate. Ms Bullock concedes: ' Post-GFC, however, policymakers globally (including Australia) are more exercised about system-wide risk. This has resulted in three changes: more scrutiny of the global financial system, strengthened regulation and a greater willingness to respond when risks appear to be rising.'

In her final paragraph she says: ' While the basic way we look at financial stability has not changed, experience with the GFC reinforced the need to focus on system-wide issues. We need to spend time analysing them and thinking about whether policy responses might be required. We are still learning how best to do this.'

If the housing bubble collapses and leads Australia's economy into its first recession for a quarter century, a far harder conclusion will be drawn.


Fiona Prior has been visiting the movies, and likes Moonlight.

' Well, Moonlight is definitely worthy and it is also completely engrossing. The cinematography is glorious, the acting is superb and the script is full of the cliché-less surprises in approach to a subject that make any movie memorable. Down with stereotypes!

The Sporting Life

Only 5 sleeps til the AFLM season opens at the 'G', with Richmond vrs Caaarlton! Henry's oldest grown son has bought the tickets, and Henry will buy dinner in the Jim Styne room. I have not counted on this game as a win, so if I am wrong that will be a bonus.

As a forecaster I always 'planned for the worst but hoped for the best'. I sense the current RBA generally avoids telling the Treasurer tough truths but perhaps in discussion they do this. I certainly hope so. Our economic situation is parlous.

The Grand final of the AFLW season is on later today. Will report if the cricket is dull enough to allow Henry to watch the ladies tearing into each other on the telly.

The cricket on the first two days was more than a glass half full. Mr Smith won the toss and batted - his own near double century and Mr Maxwell's century were brilliant.. So far the pitch has held up well, and late on Day 2 the Indian batters dug in and scored well. The first half of the third day will tell the story of this game.

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