Wikinvest Wire

Far superior central banking in Australia

Thursday, August 13, 2009

Being a major exporter of raw materials located not far away from the country with the most ravenous appetite for commodities the world has ever seen must make monetary policy a bit easier to carry out in Australia than in other countries.

Nonetheless, with a frightening housing bubble earlier in the decade that has since proved to be far less damaging than those in other Western countries, they seem to do a much better job at the central bank down under, at least according to this report in Reuters.

Policy makers daunted by the idea of puncturing asset bubbles in coming years can learn from Australia's central bank, one of the very few to have deflated a housing boom without turning it into a crash.

As the world cleans up after the U.S. housing debacle, central bankers are already fretting over how to tackle the next bubble, which may not be too far off as super-easy monetary policies worldwide leave financial markets flush with cash.

Up until a year ago, many central bankers such as Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan, believed bubbles can't be spotted or tempered.

But the Reserve Bank of Australia (RBA) challenged that view when it leaned against Australia's housing boom in 2002 by refusing to cut interest rates despite a world economic slowdown, opting instead to talk down the property market.

"Other countries are looking at the Australian example as a very positive one, and there are some lesson to be learnt from that episode," said Brian Redican, an economist at Macquarie.
Lessons to be learned indeed.

One of the worst sins committed by other central banks who fostered much bigger and much more destructive housing bubbles was that economists rarely left the security of their office desk with its green lampshade to venture out into the real world.

Content to look at reams of economic statistics about housing starts, population growth, and bank reserves, and then formulating twisted explanations for why everything was hunky-dory, all it would have taken to spot the U.S. housing bubble was to spend an hour or two at a mortgage broker's office or at a real estate investment seminar earlier in the decade, something that, amazingly, central bankers in Australia did.
RBA officials attended property seminars to observe over-zealous salesmen, dubbed locally as "property spruikers," who encouraged buyers to think home prices will never fall.

All that led the RBA to refrain from joining other central banks in cutting rates in 2002-03 when economies faltered after the September 11 attacks, the SARS outbreak and the Iraq war.

Then RBA governor Ian Macfarlane went out of his way to talk would-be property buyers out of their investments. "I'm using a certain amount of moral suasion to try and investors, to make them sit back and think again," he said in 2002.

The RBA was so forceful in talking down the housing market many suspected property prices dictated its monetary policy, which the RBA denied. It declined to respond to this article.
Of course, the next bubble is shaping up to be something entirely different than the last one, so, any lessons learned from the Aussies will have to be adapted to bubble now forming.

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Anonymous said...

Houses prices are in full bubble mode, the govement is bribing youngs to get deep in debt to continue this ponzi (at 95% LVR).

Australia has the most expensive houses in the world.Land prices are thru the roof (more expensive than Netherland !!!)

Just ridiculous.Banks like CBA with their huge balancesheet are going to be totally bankrupt when the bubble pops.

Anonymous said...

I remember during the 2008 crash. the Australian Reserve Bank dumped all their USD reserve. Not sure what's their view now. I hope they didn't accumulate them back

Bron said...

Steven Keen would not agree. He is one, if the only, Australian economist who takes a contra view. I would strongly recommend reading this:

"Australia’s house price bubble did go off the boil a bit in 2004, but it went right back on again in 2006. Rather than our house price adjustment starting before America’s, on this price to income comparison our bubble continued well after the acknowledged bursting of the US bubble in mid-2006."

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