Friday, 5 August 2016

Glenn Stevens, Oz's Alan Greenspan?

"The risk he [Glenn Stevens] faces is that, if doomsayers such as Steve Keen are right this time, Stevens could go down as Australia's Alan Greenspan - the man who fuelled the US housing bubble that ended up blowing up its economy." (Michael Janda)

Last Tuesday (August 2) the RBA decided to lower interest rates to a historical minimum of 1.5%, in an attempt to inject some oomph into the flagging Australian economy.

Economists call such interest rate manipulations "monetary policy": a prerogative of central banks (as the RBA). In a nutshell, the idea is that lower interest rates should induce both private investment (through lower financing costs) and household consumption (through making private saving less attractive).

As the previous description suggests, monetary policy has an evident Keynesian pedigree: it's all about stimulating private aggregate demand.[@]

The problem with monetary stimulus in Australia is that it has failed to revive the local economy.

Why? There are several competing theoretical explanations:

  1. From a strictly Keynesian perspective comes perhaps the most politically convenient one: Animal Spirits. (Understandably, the RBA Governor, Glenn Stevens, has long flirted with that [*]).
  2. Mainstream Keynesians, of the IS-LM variety, perhaps would appeal to the liquidity trap.
  3. In a departure from strict Keynesianism, MMTers see monetary stimulus as much less effective per se than fiscal stimulus (for what it is worth, I agree with them, but my opinion is besides the point).
In Australia's case, however, another factor may have contributed: the financial sector is concentrated around four large banks (ANZ, CBA, NAB, and Westpac), which systematically fail to reduce their lending rates as much as indicated by the official rate. Thus, while the RBA cut interest rates by 25 basis points, ANZ passed on 12, only; the CBA, 13; NAB, 12; and Westpac, 14.

Such state of affairs generated the predictable if inconsequential outrage from borrowers and official figures (including PM Malcolm Turnbull, once a free-marketeer linked to Goldman Sachs), although, according to the ABC's Michael Janda, it may have an unacknowledged silver lining:
"The banks' move may make a few ebullient property investors rethink their assumption that mortgage rates will keep going down."
Janda doesn't quite embrace Keen's confident prediction of a recession next year (neither does he mention fiscal policy in an otherwise thoughtful piece), but he is only slightly more cautious than Keen:
"Perhaps Australia will muddle through a few more years without a recession but, as economist Steve Keen recently warned, the storm clouds are gathering fast."
One way or another, we shall see.

[@] I suppose readers, even those critical of monetary policy, would acknowledge something: it is also a simple, intuitive explanation.
[*] Incidentally, if you don't like Stevens' Keynesian Animal Spiritism you are very welcome to disprove it. Which makes me wonder what Karl Popper, apostle of falsificationism and new patron saint of internet post Keynesians, would have said of that.

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