Opportunities in the economic lab

While Australia is a relative minnow among the big world markets the county’s Reserve Bank governor Glenn Stevens has provided an excellent opportunity to judge different approaches to financial crisis – in real time.

Stevens has said he would have no hesitation raising interest rates on the eve of a likely November election if necessary. The Reserve Bank board will be armed with new inflation figures when it meets on November 5. The move might bring an election date forward, but that is another argument.

Need for regulation
Stevens has called on the Federal Government to more strictly regulate mortgage brokers in the wake of the turmoil in the US subprime loans market. "Selling finance is not the same as selling a used car - it is different and I think part of what is needed is better discipline from the sales process," he argued.

He said the bank would have to lift interest rates during the federal election campaign if an inflation figure in October showed more tightening was needed. "If it is clear that something needs to be done, I don't know what explanation we could offer the Australian public for not doing it, regardless of when the election might be due.”

The Reserve chief’s approach is certainly quite different from other central bankers around the world. He finds the idea of dropping rates to bail out the beleaguered home lender market anathema. He certainly sees an argument for the markets to sort out their own shit.

Generally, at the top end, the Australian economy is in good shape. Our issues are more to do with effective fiscal policy – the distribution of the bounty we now enjoy. I guess having buckets of money are an effective hedge if Stevens wanted to go down that track, but instead he has given us the opportunity to watch an alternative approach play itself out.