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John Hewson 'embarrassed' over RBA independence

By Robert Barwick

As one of the fathers of Reserve Bank "independence", former Liberal Party leader John Hewson is now saying he is embarrassed at the consequences it has had for the Australian economy.

In a stark 15 March opinion column in the Sydney Morning Herald entitled "We're at a global debt precipice and our central banks are failing us", Hewson insisted the RBA must be held accountable for its actions.

The RBA forecast growth would be above trend, but it has created an economy with faltering growth, "perhaps heading towards a recession", Hewson said. He blamed the RBA for creating an economy in which household debt is among the highest in the world, around 120 per cent of GDP and 200 per cent of household disposable income, and a large percentage of bank loans are sub-prime.

It's not just the RBA. "Globally, having basically created the GFC by the creation of excessive liquidity, central banks responded by again flooding the world with excessive liquidity", Hewson wrote. Yet the liquidity produced neither the feared inflation, nor sustainable growth, but central banks have not been able to disengage themselves from Quantitative Easing (QE). Their balance sheets are still three times their size at the time of the GFC, he observed. In recent weeks central banks have started to fear a fall in growth and recession.

"So, the world economy has been left teetering on the brink of a precipice, with central banks essentially unable to respond", he said. "The bottom line of all their liquidity easing has been a significant increase in global debt and inequality, both now serious constraints on our global capacity to move forward."

Independence vs accountability

The former Opposition leader called into question the RBA's independence.

"As a long-term advocate for independent central banks, and for inflation targeting as their modus operandi, my advocacy for an independent Reserve Bank here in Australia dating back to an academic paper in 1980, I am embarrassed and dismayed as to where we have ended up", Hewson wrote. "Being entirely objective, you'd have to conclude that the RBA has been asleep at the wheel. Unfortunately, the RBA has been put on a pedestal with our politicians unwilling to criticise—but even though the bank is independent, it should still be held accountable, like any other arm of government."

He also noted US President Donald Trump's "intolerance" for an independent Federal Reserve.

This is a very significant call from John Hewson. He was the first Australian politician to call for the independence of the Reserve Bank, which was a plank of his illfated 1993 Fightback election platform. That manifesto represented the high water mark of the neoliberal agenda in Australia, espousing as it did: a regressive consumption tax that gouged the poor to fill the hole in tax revenue as industries were encouraged to go offshore; a userpays economy in which infrastructure would be tolled; and central bank independence. Although Hewson and Fightback lost to Paul Keating, Hewson's main policies were later implemented by John Howard and Peter Costello. They declared the Reserve Bank independent in 1996 (a year later newly elected UK Prime Minister Tony Blair followed suit with the Bank of England, which underscores this was part of a global neoliberal agenda).

Central bank independence

became a neoliberal article of faith in Australia. For instance when Kevin Rudd was leader of the Labor Party in 2007, he established his bona fides as an "economic conservative" by proclaiming in a television ad, "I am committed to balancing the budget over the economic cycle, and maintaining the independence of the Reserve Bank."

For the last few years, however, it has been clear that the neoliberal consensus has fallen apart. Current UK Labour Party leader Jeremy Corbyn is an example of this: British PM Theresa May said after Corbyn almost defeated her in 2017 that "we thought there was a political consensus" on free-market economics, the importance of fiscal prudence, wealth creation—"Jeremy Corbyn has changed that". Donald Trump's hostility to free trade, and the new Italian coalition government, are other examples. But there is no greater example than having someone like John Hewson questioning central bank independence.

The era of central bank independence has been relatively recent, just the past 20-30 years. For many decades prior, governments had a much greater say in monetary policy, and before that some countries including Australia had government-controlled national banks. Australia had a huge political fight in the 1930s over central bank independence, which was settled by the 1937 Banking Royal Commission which found that the government should be the ultimate authority—a principle that was held to varying degrees until 1996.

The era of central bank independence can therefore be thought of as an experiment, which John Hewson at least is marking as a failure. As an example of an RBA decision for which it should be held to account, Hewson said he was "disturbed" that the RBA excluded asset prices (mainly real estate) from its working definition of inflation, which determines where it should set interest rates. Because the inflation measure never included the skyrocketing house prices of the past two decades, it officially stayed low, and the RBA could cut rates and keep them at record lows. "Imagine how it may have responded differently, indeed should have responded differently, with the explosion of house prices, and household debt in recent years", he said.

Hewson concluded with a sharp swipe at economists, as well as central banks: "While central bankers look bad, so do economists", he said. "They need plausible explanations as to why the massive liquidity expansions didn't create runaway inflation? They need to address the likely consequences of sustained periods of negative interest rates? They need to explain why Trump's tax cuts didn't actually ‘trickle down' to significant investment, jobs, wages, and growth, rather than simply create record levels of dividend payouts and share buy-backs? They need to explain why wages have essentially flat-lined through all this.

"Central banking is now in crisis, really with no answers. There is a very real risk of another GFC/credit/liquidity crisis, even as global growth slows. Central banks don't have the policy armoury, nor the capacity, to respond."


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