Working Papers

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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Not sure what the point of McCrann’s article is, but this bit is interesting.

We didn’t stumble by mistake into this slowdown.

So even one of the RBA’s tame journos concedes they made “the mistake” on purpose.

Posted by .(JavaScript must be enabled to view this email address)  on  10/19  at  02:19 PM

One of the points he is making is that but for the credit crisis, we would have likely seen two additional RBA rate hikes in May and August.

As I have argued before, if there was a mistake made, it was in not tightening more in 2004-2006.  This would have obviated the need for the late cycle tightening.  Indeed, the RBA might have even been in a position to offset rather than add to some of the market-led tightening that came as a result of the credit crisis.

Posted by skirchner  on  10/19  at  03:18 PM

Well yes. That’s an interesting theoretical point (McCrann’s) but entirely trivial. I’m not sure that nobody knows that - but in the context of the crisis nobody cares. Much like a medical doctor saying, “If the patient weren’t dead we’d still be medicating.”

Whether they should have raised rates earlier is an issue well worth considering. Along with why they increased rates when they did. The issue is how and why they stuffed up, not whether they stuffed up. Either way the costs of failure and blame need to be apportioned.

Posted by .(JavaScript must be enabled to view this email address)  on  10/19  at  03:43 PM

I would stand by what I said here:


It was published in The Age, so it must be true!

Posted by skirchner  on  10/19  at  08:50 PM

Of course - except only what’s on the back page of the Business Age is true. Here’s my most recent contribution,
with another coming out this coming week.

Posted by .(JavaScript must be enabled to view this email address)  on  10/19  at  09:12 PM

Pure greed and a total lack of accountability is what got us into this mess and a returning to it will get us out over time.

Posted by delerben  on  10/20  at  01:25 PM

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