Philip Lowe Did Nothing Wrong.
That doesn’t mean he did anything right. But neither did the chorus of talking heads now vilifying him.
The only thing the RBA governor is guilty of, really, is expertise. He is a professional, university trained economist, competently implementing textbook monetary policy as widely accepted by the rest of the accredited economic community. If he’s wrong, and I am not saying he isn’t, then he’s wrong in excellent company.
The heads of every other central bank in the world, with the overwhelming support of their boards, are doing the same thing. It’s here that the definition of expert, as opposed to an intellectual, becomes crucial. An expert will take comfort from the fact that everyone else was wrong, too. Why should they have been expected to see what others couldn’t? An intellectual would draw no such comfort. If they are wrong, they would rather at least be original. It is as George Bernard Shaw wrote:
The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.
Lowe’s crime, then, is that he lacks the spiritual heroism and promethean genius to drive history forward, something which necessarily includes an active urge to attack and overturn the existing order. He is a thoroughly reasonable man, as such he accepted and promulgated the consensus professional view, rather than insisting that he knew better like some messianic lunatic.
The reserve bank has a clear mandate, and is expected to execute that mandate in predictable ways, allowing other market participants and the government to plan around it as well as possible. If inflation is below 2%, it cuts rates. If inflation is above 3%, it raises them. This is treated as “independent” from wage, trade and fiscal policies. Because magic.
Is it a good idea? No, it’s a terrible idea. But it’s been a terrible idea for a long time, and the damage has already been done. It is just now being revealed.
Consider the “marginal mortgage holder” and their “pain”. As rates rise, so do their payments — to unmanageable, unreasonable levels. But rates are not high, they are just up from record lows. It’s the other variable in the equation, house prices, and therefore mortgage sizes, that are high — just off record highs. The battlers of the mortgage belt were screwed when they overpaid for a house in the middle of the bubble, not when they had to pay off the loan under relatively normal credit conditions.
And it’s not a coincidence that record low rates and record high prices happened at about the same time, either. For decades, rates have trended down and prices have trended up. Homelessness also rose steadily, under the Coalition and under Labor — including the period when progressive champion Tanya Plibersek was housing minister, with tent cities popping up around the sydney city fringes, minutes from her office. No one was calling for the head of the RBA to resign then, not even the Greens. They were amassing property portfolios.
All this context, and the politicians own, significant, vested interest as asset holders, was absent from the recent hearings where Lowe spent an hour and a half answering questions from senators, and three hours answering questions from MPs. I watched both sessions, and also a similar hearing held in the US at which Chair of the Federal Reserve Jerome Powell was asked, once, about 20 years of “artificially” low rates. It was far less attention than this crucial background deserved, but — more than Australia’s legislators gave it.
His response perfectly encapsulates the deliberately narrow, technocratic thinking by which central banks operate.
In theory there’s this thing called the neutral level of interest, and we know it only by its works. And neutral is the level that neither pushes the economy up nor pulls it down. And it changes over time. This is the thing about these important variables in economics, so what’s happened until now was that the neutral level of Interest went down and down and down to the point where, you know, many countries had zero interest rates and very low inflation.
He then moves on to the supply shocks during the pandemic and the war in Ukraine, which disrupted this long — unexplained — deflationary trend. We know it only by its works.
In terms of more satisfying answers, here’s mine:
- In the closing decades of the last century and the first decades of this century, labour power in the developed world collapsed due to cross border wage competition.
- By the 90’s the (perceived) political centre moved right on economics. Public services were privatised. Trade and industrial policy further weakened worker power. Neoliberalism reigned.
- Wages failed to keep up with productivity.
- This prolonged and worsening shortfall in spending power, compared to economic output, was deflationary.
- Central banks repeatedly responded to these deflationary headwinds, predictably and reliably, with interest rate cuts, promoting ever higher levels of debt.
- This debt, the expansion of which had been saving neoliberal policy from its own destructive consequences, like substance abuse masking the economy’s trauma, is now unmanageable.
- We are, and have been since some time before rates hit zero during the pandemic, historically, bowleggedly, assemble-at-home-beframe, screwed.
If the government, which leads the dance, wanted different behaviour from the central bankers, they themselves needed to behave differently.
Will they see the light, and have the courage to tear up the economic textbooks? Will they rise to the challenge of imagining a new and better economy?
I doubt it. After all, they’re only experts.