Double standards in the official family

Where will the Reserve bank chairman, Glenn Stevens, and his high powered board be over the next few weeks, as waves from the US sub-prime tsunami hit Australian markets?

Where do you think? Out on the beach, like other Australians. That’s right, this bold board, which could not possibly hold off a “necessary rate rise” during the recent election campaign – even though that was unprecedented – can certainly do so, if something really important is at stake.  Its own rec leave, for example.

The board, which traditionally meets on the first Tuesday of each month, will be skipping January – this time. It will not meet again till February.

Ordinarily, that would not matter. But the situation, right now, is so serious that the board almost ordered yet another rate rise, earlier this month.

The minutes, from its November 6 meeting, leave no room for doubt about that.

“Members remain concerned about the outlook for inflation,” those minutes, which were published yesterday, said.

“Inflation in CPI and underlying terms was expected to be above 3 per cent in the first half of 2008, before declining somewhat thereafter….” they declared.
“The information available on the domestic economy thus suggested higher interest rates were likely to be required,” they added.

Some months ago, Mr Stevens declared that the board would be prepared to act, to raise rates, during an election campaign, if necessary.  That was admirable.  But what if action should be urgently needed during January?

Does it matter?  On the Reserve Bank’s own published credo, on the issue of urgency, it could.  Besides, just consider a few words from the memoirs of another central bank chief, Alan Greenspan.

Mr Greenspan,  now in retirement, wrote in his book The Age of Turbulence”:I was aware that the loosening of mortgage credit terms for sub-prime borrowers increased financial risk.

“But I believed then, as now, that the benefits of broadened home ownership are worth the risk.”

That position is becoming increasingly difficult to defend.

A New York Times columnist, Edmund L. Andrews,who is no fan of Mr Greenspan, recalls in a scathing article that the Fed had been warned, many times, of the emerging sub-prime mortgage crisis in the US.

But it chose to do nothing.

That article is worth reading.  Its at www.nytimes.com