Conflict of interest rates

Shopping centre magnate Frank Lowy steps down from the Reserve Bank Board on December 9, and a party is planned in his honour. I have a lot of time for Lowy, not only for giving money to kickstart our premier international relations thinktank, but also for his own personal story (one of the most moving speeches in Michael Fullilove’s recent collection is by Frank Lowy).

But it does raise the question: why on earth does Australia allow monetary policy to be set by a board mostly comprising people whose businesses are interest-rate sensitive, rather than by professional economists, as the US does?

(And please, don’t give me the "but everyone has a mortgage" line.)

Update 1: Mark Bahnisch raises a similar problem – the re-review of ARC grants by people with no apparent expertise in the topic areas.

Update 2: Stephen Kirchner refers to the rumour that former Liberal Party Treasurer Ron Walker may be appointed to replace Lowy, and argues that "the main qualification for most Board appointments will remain a lack of expertise in monetary policy".

This entry was posted in Uncategorized. Bookmark the permalink.

9 Responses to Conflict of interest rates

  1. Sinclair Davidson says:

    You’re avoiding the real question here. Is there any evidence to suggest the Australian ‘amateurs’ are any worse than the US ‘professionals’?

  2. Matt Canavan says:

    Good point Sinclair. Indeed, the RBA’s handling of the equity and housing booms appears much more slicker than their supposedly better qualified American counterparts.

  3. Andrew Leigh says:

    Factoring in the RBA-induced recession of 1990-91, my answer would be yes, I think that over the past 20 years we’ve had worse monetary policy than the US. But that’s not the only question – it’s also the case that our system gives a preview of future interest rates to a handful of big business scions. Plenty of others in the corporate world would like to know interest rate movements in advance.

  4. Sinclair Davidson says:

    ‘Plenty of others in the corporate world would like to know interest rate movements in advance.’

    I imagine the same constraints face our business types as do the professional economists – everybody would like to know interest rate movements in advance.

    I take your point about the 1990/1 recession. But the level of RBA independence and Fed independence can only be compared over the past 10 years or so (could be wrong on this). I imagine this would be a nice research project in ten years or so.

  5. Matt Canavan says:

    But, the stuff up of 17 per cent interest rates can hardly be blamed on the influence of business groups, who, as you say in the original post are “interest-rate sensitive”. The recession was caused by the boffins in Treasury who were obsessed with our current account deficit. To me it seems like a counterexample against having ‘experts’ too much invovled.

  6. Sacha Blumen says:

    Good question Andrew – maybe Aust governments think that having interested people on the board brings more positives than negatives – maybe they think that people in business have a more “intuitive” feel to the economy? That’s probably not saying very much.

  7. Sacha Blumen says:

    Maybe “disinterested experts” and “interested amateurs” can complement each other.

  8. In practice, policy is effectively made by the senior officers of the Bank and the Board is there to give some legitimacy to their decisions. Since few Board members have the capacity to seriously contest the recommendations made to them, the current arrangements already amount to rule by experts, but without the accountability and transparency that would come from a formal monetary policy committee. The other issue is the failure to separate monetary policymaking from the other governance functions of the Bank.

Comments are closed.