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Saved Not Spent: Ricardian Equivalence Negates Fiscal Stimulus
Westpac crunches the numbers on the household income account, with some predictable results:
All up, the total fiscal boost to household disposable income in Q3 was about $1.9bn. This was mostly due to $7.1bn in income tax cuts, which equates to $1.8bn a quarter. The boost appears to have done little or nothing to stimulate consumer spending in Q3. Indeed, with aggregate household savings rising by $4.4bn in the quarter, the implication is that, in aggregate, households saved all of the windfall and then some. Most of the savings appears to have gone towards paying down housing debt.
The national accounts figures and RBA credit data imply that households injected an enormous $7.5bn into their housing equity in Q3, most of which would have been via paying down principal. This is only the third net equity injection recorded since June 2001. It is easily the largest ever in dollar terms and is the biggest as a proportion of income since 1998Q3. If Q3 is a guide and households remain as deeply concerned about reducing their debt levels in the months ahead, the implication is that there will be little or no boost from policy stimulus in Q4.
Westpac nonetheless thinks Q4 might be different, on the basis that saving all the stimulus in Q4 would be ‘too extreme’, but unprecedented times are likely to induce unprecedented responses as households anticipate a higher future tax burden.
posted on 03 December 2008 by skirchner in Economics, Fiscal Policy
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Why Falling Commodity Prices May be Good for Growth
The Australian economy expanded 0.1% in the September quarter, which is dismal enough, but non-farm GDP contracted 0.3% over the quarter. Farm output rose 14.9% over the quarter. In current prices, the increase was only 7.5%, but the price deflator for farm GDP fell 6.5% over the quarter.
This points to a little appreciated aspect of the relationship between commodity prices and the Australian economy. High commodity prices are often the flip side of weak commodity production, which depresses real GDP growth. To the extent that lower commodity prices reflect increased output, this is actually a positive for real GDP growth.
As I argue in a forthcoming article in Policy, commodity prices are far less important to economic growth in Australia than conventionally assumed.
posted on 03 December 2008 by skirchner in Commodity Prices, Economics
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Did the Australian Economy Contract over the September Quarter?
The consensus forecast for September quarter GDP growth to be released on Wednesday is 0.2%, with growth through the year seen at 1.9%. Market forecasts range from -0.3% q/q to 0.5% q/q. Dusting off the old top-down GDP model, I also get 0.2% q/q.
Growth would then have to accelerate slightly to 0.3% in the December quarter to be consistent with the RBA’s year-end forecast of 1.5%. That may be a tall order given what is happening both domestically and globally, but by no means impossible.
The market is expecting a 75 bp reduction in the official cash rate to 4.5% tomorrow. With the RBA’s forecast for underlying inflation for the December quarter at 4.5%, the real cash rate will effectively be zero.
posted on 30 November 2008 by skirchner in Economics, Financial Markets
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Foreign Oil is Your Friend
Roger Howard, author of The Oil Hunters, on how foreign oil creates interdependence rather than dependence:
to identify America’s “foreign oil dependency” as a source of vulnerability and weakness is just too neat and easy.
This identification wholly ignores the dependency of foreign oil producers on their consumers, above all on the world’s largest single market—the United States. Despite efforts to diversify their economies, all of the world’s key exporters are highly dependent on oil’s proceeds and have always lived in fear of the moment that has now become real—when global demand slackens and prices fall. The recent, dramatic fall in price per barrel—now standing at around $54, less than four months after peaking at $147—perfectly exemplifies the producers’ predicament.
So even if such a move were possible in today’s global market, no oil exporter is ever in a position to alienate its customers. Supposed threats of embargoes ring hollow because no producer can assume that its own economy will be damaged any less than that of any importing country. What’s more, a supply disruption would always seriously damp global demand. Even in the best of times, a prolonged price spike could easily tip the world into economic recession, prompt consumers to shake off their gasoline dependency, or accelerate a scientific drive to find alternative fuels. Fearful of this “demand destruction” when crude prices soared so spectacularly in the summer, the Saudis pledged to pump their wells at full tilt. It seems that their worst fears were realized: Americans drove 9.6 billion fewer miles in July this year compared with last, according to the Department of Transportation.
Instead, the dependency of foreign oil producers on their customers plays straight into America’s strategic hands.
posted on 29 November 2008 by skirchner in Economics, Oil
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The Robertson-Keen Wager
Rory Robertson gets ready to send Steve Keen on a long walk:
To make it interesting, I offered Dr Keen a challenge…
On the maybe 1% chance that he is right, and capital-city home prices do indeed fall by 40% within the next five years - starting from Q2 2008, and as measured by the ABS - I will walk from Canberra to the top of Mt Kosciusko (that’s maybe 200km followed by a 2228-metre incline).
If Dr Keen turns out to be less than half right, as I expect, and home prices drop by (much) less than 20%, he will take that long walk. Moreover, the loser must wear a tee-shirt saying: “I was hopelessly wrong on home prices! Ask me how.“
We now have a bet, and I expect to record an easy win within two years.
posted on 27 November 2008 by skirchner in Economics
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Capital Xenophobia II
The Centre for Independent Studies has released my Policy Monograph Capital Xenophobia II: Foreign Direct Investment in Australia, Sovereign Wealth Funds and the Rise of State Capitalism.
The monograph revisits the subject of Wolfgang Kasper’s original 1984 Capital Xenophobia monograph. Wolfgang was kind enough to write the foreword to this update of his earlier work on the subject.
There is an op-ed version in today’s AFR for those who have access, reproduced below the fold for those who don’t (text may differ slightly from the edited AFR version).
continue reading
posted on 27 November 2008 by skirchner in Economics, Financial Markets
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Why Was Fed Policy ‘Too Easy’ Between 2002 and 2005?
Larry White has a new Cato Briefing Paper How Did We Get into This Financial Mess? White echoes a now widespread criticism of US monetary policy, that is was too easy in the first half of this decade:
The federal funds rate began 2001 at 6.25 percent and ended the year at 1.75 percent. It was reduced further in 2002 and 2003, inmid-2003 reaching a record low of 1 percent, where it stayed for a year. The real Fed funds rate was negative - meaning that nominal rates were lower than the contemporary rate of inflation - for two and a half years.
White also notes that the Fed funds rate was below that implied by the Taylor rule, a point that Taylor himself has also made.
That US monetary policy was easy at this time was no accident. It was a very deliberate policy choice on the part of the FOMC. Why was policy kept so easy for so long? One reason was the perceived threat of deflation, as Vince Reinhart recalls:
According to FOMC meeting transcripts from that year, then Chairman Alan Greenspan in November [2002] called deflation “a pretty scary prospect, and one that we certainly want to avoid.”
Then Gov. Ben Bernanke, now Fed chairman, said in September 2002, “the strategy of preemptive strikes should apply with at least as great a force to incipient deflation as it does to incipient inflation.”
In hindsight while there was clearly a strong disinflation trend back then, outright deflation didn’t appear to be as big a risk as the Fed thought. Annual growth in consumer prices never fell below 1% and was rarely below 2% after 2002.
The problem back then, Reinhart said, was “we didn’t know why inflation was going down as much as it was.”
That year, 2002, “was very much a story of uncertainty about the inflation process with some modest identifiable forces putting downward pressure” on prices, he said.
This puts the failure of US monetary policy to respond to the emerging US housing boom in its proper context. The following chart shows annual growth in US industrial production as a proxy for the broader economy, along with new privately-owned dwelling starts as a proxy for housing activity. Shaded bars are NBER-defined recessions.
The 2001 recession was exceptional compared to previous business cycles, in that housing activity did not see a significant downturn along the rest of the US economy. Industrial production was subdued coming out of the 2001 recession (note the double dip into negative growth), while housing continued to enjoy a strong expansion. If the 2001 recession could not tame the US housing boom, then it is hard to see how tighter US monetary policy could have done so without inflicting significant, and potentially deflationary, collateral damage on the rest of the economy.
One could argue that Fed policy was a success on its own terms, because it achieved exactly what it set out to do: pre-empt the threat of deflation.
posted on 21 November 2008 by skirchner in Economics, Financial Markets
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Has the RBA Given the ‘Green Light’ to ‘Bubble’ Popping?
RBA Governor Glenn Stevens’ speech to CEDA last night has been widely interpreted as giving a ‘green light’ to deficit spending, as if politicians ever needed permission or encouragement from the Reserve Bank to ramp-up spending. The really significant part of Stevens’ speech went largely unnoticed:
in addition to the many useful steps being planned by regulators, perhaps we could pay more attention to the low-frequency swings in asset prices and leverage (even if that means less attempt to fine-tune short-period swings in the real economy); we could have a more conservative attitude to debt build-up; and we could exhibit a little more scepticism about the trade-off between risks and rewards in rapid financial innovation. This would constitute a useful mindset for us all to take from this episode.
The fudge word here, of course, is ‘more.’ More could simply mean giving greater weight to the implications of developments in asset prices for inflation and the overall economy. However, it could potentially extend much further, to an attempt by central bankers to actively manage asset prices at the expense, as Stevens suggests, of shorter-run demand management. As I argue here, the historical precedents for this are far from encouraging.
A more recent example of a central bank conditioning monetary policy on asset prices was the Reserve Bank of New Zealand’s use of the trade-weighted exchange rate as part of a composite operating target between 1996 and 1999, known as the monetary conditions index. This practice was abandoned, because the well-known volatility of exchange rates and their very loose relationship with economic fundamentals made it a very poor basis for conducting monetary policy. The weaker the connection between asset prices and economic fundamentals, the stronger the argument against using asset prices as either targets or conditioning variables for monetary policy.
posted on 20 November 2008 by skirchner in Economics, Financial Markets
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Software Update
The software that runs Institutional Economics has been updated. Please let me know if you experience any problems: info at institutional-economics.com. This site is powered by ExpressionEngine.
posted on 15 November 2008 by skirchner in Misc
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Regulating Ratings Agencies
The federal government is proposing to further regulate credit ratings agencies:
The Government also unveiled changes to the regulation of credit ratings agencies that will require them to hold an Australian Financial Services Licence and to report annually on the quality and integrity of their ratings processes.
The changes reflect a growing demand in the global investment community for greater oversight of ratings agencies, which have become the target of criticism, particularly for their role in rating structured finance.
This ignores the somewhat inconvenient truth that the role of ratings agencies in credit markets was itself mandated by regulation. As Charles Calomiris has argued, the regulatory power given to the ratings agencies encouraged them to compete on relaxing the cost of regulation to investors, generating huge fees for the ratings agencies in the process. Calomiris summed it up this way: ‘the regulatory use of ratings changed the constituency demanding a rating from free-market investors interested in a conservative opinion to regulated investors looking for an inflated one.’ Calomiris notes that both Congress and the SEC actually encouraged ratings inflation in relation to sub-prime CDOs, an unintended consequence of their promotion of rules designed to prevent ‘anti-competitive’ behaviour on the part of the dominant ratings agencies.
posted on 14 November 2008 by skirchner in Economics, Financial Markets
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When Bubble Poppers Attack
I have an op-ed in today’s Australian, arguing against the view that central banks should explicitly target asset prices:
In 2002, prior to becoming Fed chairman, Bernanke gave a speech titled Asset “Bubbles” and Monetary Policy. Bernanke noted that “the correct interpretation of the 1920s is not the popular one: that the stock market got overvalued, crashed and caused a Great Depression. The true story is that monetary policy tried overzealously to stop the rise in stock prices. But the main effect of the tight monetary policy was to slow the economy. The slowing economy, together with rising interest rates, was in turn a major factor in precipitating the stock market crash”.
The singular cause of the Great Depression of the 1930s, in Bernanke’s view, was that the Federal Reserve fell under “the control of a coterie of bubble poppers”.
Bernanke was merely reaffirming a well-established consensus among economists, ranging all the way from John Maynard Keynes to Milton Friedman. In his A Treatise on Money, Keynes said: “I attribute the slump of 1930 primarily to the deterrent effects on investment of the long period of dear money which preceded the stock market collapse and only secondarily to the collapse itself.“ Friedman’s 1963 A Monetary History of the United States also laid blame for the Great Depression squarely at the feet of the Fed and its attempt to become “an arbiter of security speculation or values”.
posted on 11 November 2008 by skirchner in Economics, Financial Markets
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Labor’s Expensive Manufacturing Fetish
I have an op-ed in today’s SMH critical of the federal government’s ‘new’ car industry plan:
Labor’s manufacturing fetish is long-standing and deeply held. Kevin Rudd’s observation, made as opposition leader in 2006, that he wanted Australia to be “more than a mine for China and a beach for the Japanese” suggests this fetish is based on a caricature of the Australian economy…
The billions of dollars in help provided by successive Australian governments to the local car industry has come at the expense of consumers and taxpayers, destroying jobs and income in other industries. This is the real, but largely unseen, cost of industry assistance.
posted on 11 November 2008 by skirchner in Economics
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A Libertarian Defence of Alan Greenspan
The scapegoating of Alan Greenspan across the political spectrum has been shameful and shameless. It is therefore pleasing to see that the Cato Institute has published a timely defence of Greenspan by David Henderson and Jeff Rogers Hummel. Henderson and Hummel argue that:
Alan Greenspan stands out as the most competent—and arguably the only competent—helmsman of United States monetary policy since the creation of the Federal Reserve System…
his policy may have ended up slightly too discretionary. But that possibility hardly justifies the “asset bubble” hubris of those economic prognosticators who, only well after the fact, declaim with absolutely certainty and scant attention to the monetary measures, how the Fed could have pricked or prevented such bubbles…
Rather than demonstrating that monetarist rules are obsolete and free banking unnecessary, Greenspan’s policies suggest that the more thoroughly either of those two objectives is implemented, the greater the macroeconomic stability our economy will enjoy.
I made a similar argument here about how contemporary central banking closely approximates the free banking ideal of a market-determined monetary order.
posted on 10 November 2008 by skirchner in Economics, Financial Markets
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The Education of Sallyanne Atkinson
ABC Learning Chair Sallyanne Atkinson learns political economy the hard way:
DEEP in debt, Sallyanne Atkinson appears stunned by the collapse of ABC Learning.
“I find that absolutely bizarre” the businesswoman who chaired the failed childcare corporation for seven years said yesterday when told 40 per cent of the centres are unprofitable.
“This is a business subsidised by the Government. How can it be unprofitable?“
posted on 09 November 2008 by skirchner in Economics, Financial Markets
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Self-Importance and the G20
Former Australian Treasurer Peter Costello once told us that the G20 was ‘important in itself,‘ an idea to which he could easily relate. Former IMF Chief Economist Simon Johnson continues this fine tradition of explaining the relevance of the G20:
the fact that G20 heads of government will now start meeting (dinner is on November 14; mark your calendars) is most significant. Almost always, once a group like this meets, it can agree on its own importance and the need for another meeting.
I’m sure we can all sleep a little easier at night, knowing the G20 is on the job.
posted on 09 November 2008 by skirchner in Economics, Financial Markets
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US Presidential Vote Equation
Ray Fair’s final US Presidential election equation update:
The final economic values (‘final’ as of October 30, 2008) are 0.22 for GROWTH, 2.88 for INFLATION, and 3 for GOODNEWS. Given these values, the predicted Republican vote share (of the two-party vote) is 48.09 percent. So the prediction is 51.91 for the Democrats and 48.09 for the Republicans, for a spread of 3.82.
The current situation is unusual in that the economy since the end of the third quarter appears to have gotten much worse. People may perceive the economy to be worse than the economic values through the third quarter indicate, which, other things being equal, suggests that the vote equation may overpredict the Republican share. But for what it is worth, the final vote prediction is 48.09 percent of the two-party vote for the Republicans. The Republican share of the two-party House vote is predicted to be 44.24 percent.
posted on 01 November 2008 by skirchner in Economics, Financial Markets
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Long-Run Wealth Accumulation and Household Debt
RBA Deputy Governor Ric Battellino tells the public what Steve Keen won’t:
Australian households have much bigger holdings of financial assets than financial liabilities. Financial assets at 30 June averaged around $275 000 per household while liabilities averaged $150 000 per household. Since then, we estimate that average assets have fallen to around $245 000 per household, though this is still quite a strong position.
This balance sheet structure is very favourable in terms of maximising long-run accumulation of wealth, because the return on these assets over long terms exceeds the cost of debt by a substantial margin. The returns do not, however, accumulate evenly from year to year. Some years produce very strong returns while others produce negative returns.
posted on 29 October 2008 by skirchner in Economics, Financial Markets
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Rudd and Greed
I have an op-ed in today’s Australian responding to the Prime Minister’s attacks on ‘the culture of greed’:
Scottish Enlightenment philosopher David Hume noted as long ago as 1741: “Avarice, or the desire of gain, is a universal passion which operates at all times, in all places and upon all persons.“ One cannot explain episodic phenomena such as financial crises with reference to a constant such as human nature or rationality.
The principal mistake the critics of free markets make is to assume that self-interest, greed and irrationality affect only private sector decision-makers. Politicians and regulators are just as prone to self-interested behaviour and do not become saints by virtue of elected or unelected office. The public sector and regulators are populated by the same species that is found in the private sector and financial markets. We should always be suspicious of claims to superior moral virtue coming from politicians.
posted on 29 October 2008 by skirchner in Culture & Society, Economics, Financial Markets
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Greenspan was Right
Alan Greenspan tries to educate a deaf and dumb US Congress, 6 April 2005:
We at the Federal Reserve remain concerned about the growth and magnitude of the mortgage portfolios of the GSEs, which concentrate interest rate risk and prepayment risk at these two institutions and makes our financial system dependent on their ability to manage these risks. Although Fannie and Freddie have chosen not to expand their portfolios significantly this past year (presumably at least partly in light of their recent difficulties), the potential for rapid growth in the future is not constrained by the existing legislative and regulatory regime. It is a reasonable presumption that rapid growth is likely to resume once Fannie and Freddie believe they have resolved their current difficulties. Without changes in legislation, Fannie and Freddie will, at some point, again feel free to multiply profitability through the issuance of subsidized debt. To fend off possible future systemic difficulties, which we assess as likely if GSE expansion continues unabated, preventive actions are required sooner rather than later.
posted on 28 October 2008 by skirchner in Economics, Financial Markets
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Blaming Greenspan
The WSJ is polling readers on the question ‘How much is Greenspan to blame, if at all, for the financial crisis?’ Polling to date suggests that around 25% of readers think ‘He is more to blame than anyone else,’ while 40% maintain ‘He has significant blame.’ Only 10% say ‘he is not to blame.’
The majority view implicitly places an enormous burden on monetary policy to manage, not just inflation outcomes, but a whole range of other policy issues as well, from housing to the regulation of financial markets. The notion that monetary policy could somehow effectively deal with the multiple regulatory failures implicated in the credit crisis is absurd and goes against everything we have learned about how monetary policy should be conducted in recent decades. Unfortunately, because monetary policy is seen to have a pervasive influence over the economy, Greenspan makes for an easy target and a simple monocausal narrative for all that went wrong.
It is particularly irksome to see Greenspan having to defend himself against the blame-shifting behaviour of the US Congress. Afterall, the Federal Reserve operates under a Congressional mandate and is subject to Congressional oversight. If there were problems at the Fed, then the buck stops with Congress.
This point about accountability goes well beyond the area of monetary policy. Politicians and regulators write the rules of the game and are at least notionally accountable for the outcomes under these rules. The ferocity of attacks by politicians on corporate executives, financial markets and capitalism in general is a transparent attempt to divert attention from their own failings and avoid accountability for their policies.
posted on 24 October 2008 by skirchner in Economics, Financial Markets
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How Freddie and Fannie Fooled Paul Krugman
Charlie Calomiris and Peter Wallison in The Last Trillion-Dollar Commitment: The Destruction of Fannie Mae and Freddie Mac:
Although Fannie and Freddie were building huge exposures to subprime mortgages from 2005 to 2007, they adopted accounting practices that made it difficult to detect the size of those exposures. Even an economist as seemingly sophisticated as Paul Krugman was misled. He wrote in his July 14, 2008, New York Times column that:
‘Fannie and Freddie had nothing to do with the explosion of high-risk lending…whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.‘
Here Krugman demonstrates confusion about the law (which did not prohibit subprime lending by the GSEs), misunderstands the regulatory regime under which they operated (which did not have the capacity to control their risk-taking), and mismeasures their actual subprime exposures (which he wrongly states were zero). There is probably more to this than lazy reporting by Krugman; the GSE propaganda machine purposefully misled people into believing that it was keeping risk low and operating under an adequate prudential regulatory regime.
Krugman is hardly alone in this.
posted on 23 October 2008 by skirchner in Economics, Financial Markets
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‘Bubbles’ in Everything: Indonesian Seaweed Edition
At least one ‘bubble’ they will be hard pressed to pin on US monetary policy:
a few months ago, parts of the $14 billion global seaweed market started soaring. The price for a key type of Indonesian seaweed suddenly more than tripled, to as much as 18,000 rupiah (or $1.80) per kilogram, from about 5,000 rupiah.
Then, just as quickly, the seaweed bubble burst, adding the spindly plant to the long list of the world’s assets—including oil, stocks and houses—that have tumbled in value. By early September, prices skidded to 12,000 rupiah. By October, they were down to 10,000, and they may be headed lower.
“Nothing like this has ever happened before,“ says Asu Hasna, a 42-year-old seaweed farmer in this coastal community on the island of Sulawesi, which, along with parts of the Philippines, is a tropical seaweed hot spot. Before, she says, seaweed prices never fell. “These are bad times.“
Despite recent declines, prices are still higher than they were a year ago. But the recriminations over what went wrong have begun, complete with calls for more government involvement, efforts to make the industry more transparent and reforms to restore market confidence.
posted on 21 October 2008 by skirchner in Economics, Financial Markets
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A Failure of Understanding
Terry McCrann continues his efforts to educate the punditocracy on the relationship between the official cash rate and retail lending rates:
What has never been understood, not just by the general public but by even the supposed literati—politicians and the economentariat—is that the Reserve took those bank increases into account in deciding the official changes. If they hadn’t happened, official rates would have gone higher.
The associated failure to understand, is that the Reserve quite deliberately set out to slow the economy. We didn’t stumble by mistake into this slowdown.
posted on 18 October 2008 by skirchner in Economics, Financial Markets
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The Not So Secret Life of Nouriel Roubini
Way too much information from Gawker.
UPDATE: ‘Nick Denton Is An Anti-Semite With A Nazi Mind’.
UPDATE II: ‘A bunch of wimps’.
posted on 16 October 2008 by skirchner in Economics, Financial Markets
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The Wrong Plan for Australia
I have an op-ed in today’s Wall Street Journal on the Rudd government’s fiscal stimulus package.
posted on 14 October 2008 by skirchner in Economics, Financial Markets
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Governments are Making Things Worse
Jonathan Macey, writing in the WSJ, calls for an end to the demonisation of markets:
Despite all the hard work and good intentions on the part of our public officials, when economists and historians look back on the current financial crisis they are likely to conclude that government intervention prolonged and deepened it. In particular, officials at the Federal Reserve, the Securities and Exchange Commission and the Treasury Department are to blame for publicly losing confidence in the very economic system they are supposed to protect.
The Fed, the Treasury and the SEC appear to be in a state of panic. A crisis mentality led the custodians of the U.S. capital markets publicly to jettison their lifelong commitments to the capital markets in favor of a series of short-term regulatory quick fixes…
Letting markets work is messy and costly. Nevertheless, the only sensible way to deal with the current crisis is to force the companies who created the mess to bear at least some of the costs of their mistakes. Most of all, if the markets are to get back on track our regulators must put an immediate stop to their current practice of publicly demonizing the markets and work to restore confidence in the system.
posted on 11 October 2008 by skirchner in Economics, Financial Markets
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US 2009 Depression
For the truly bearish, Intrade launches a US 2009 depression contract. Depression is defined ‘as a cumulative decline in GDP of more than 10.0% over four consecutive quarters… Negative quarters in the preceding year will count towards the total GDP decline for expiration purposes.’
The contract is yet to trade, but the bid-ask is 5.1/15, with most of the volume on the short-side.
posted on 07 October 2008 by skirchner in Economics, Financial Markets
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RBA Once Again Shows the Irrelevance of RMBS Intervention
The statement accompanying today’s 100 bp easing in the official cash rate by the Reserve Bank once again makes explicit that the RBA calibrates monetary policy to changes in retail interest rates:
the Board judged that a material change to the balance of risks surrounding the outlook had occurred, requiring a significantly less restrictive stance of monetary policy. The Board also took careful note of movements in funding costs in wholesale markets. Having weighed these considerations, the Board decided that, on this occasion, an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers.
The RBA has always acknowledged that it is the average level of market interest rates over time that matters for the transmission of monetary policy. Much of the commentary on the extent of pass through by the banks has ignored this obvious point. Unfortunately, it is easier to bash the banks than to explain how monetary policy actually works.
Today’s announcement also shows the RBA can deliver a more substantial easing in credit conditions than could ever be achieved through government intervention in the market for residential mortgage-backed securities. The best way for the RBA to pull the rug out from under the RMBS interventionists is to be even more explicit about the extent to which it is discounting government policy in setting the cash rate.
posted on 07 October 2008 by skirchner in Economics, Financial Markets
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