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What’s eating Philip Lowe

Sep 19, 2019 • 16m49s

Philip Lowe is the governor of the Reserve Bank. He is a conventional person who’s been pushed by the economy to make unconventional choices.

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What’s eating Philip Lowe

83 • Sep 19, 2019

What’s eating Philip Lowe

[Theme music]

ELIZABETH:

From Schwartz Media, I’m Elizabeth Kulas. This is 7am.

Philip Lowe is the governor of the Reserve Bank. By all accounts he is a conventional person pushed by the economy to make unconventional choices. Mike Seccombe on how rate cuts no longer stimulate growth. And how Lowe’s office became political.

[Theme music ends]

MIKE:

Hello.

ELIZABETH:

Hey Mike.

MIKE:

How are you this time?

ELIZABETH:

Good. How are you?

MIKE:

Good. I'll just put my headphones on. Hold on a second.

ELIZABETH:

Alrighty.

MIKE:

Okay, back with you.

[Music starts]

ELIZABETH:

So Mike let's start with Philip Lowe, who is he?

MIKE:

Umm he's actually a great little Australian success story. He was a country boy from Cootamundra. Straight out of school he joined the Reserve Bank, started now in a pretty humble clerical role and put himself through university at night.

ELIZABETH:

Mike Seccombe is The Saturday Paper’s national correspondent.

MIKE:

John Hewson, the former Liberal Party leader and and an economics professor, oversaw Lowe’s honours thesis at the University of New South Wales and Hewson tells me that he thought Lowe was the best student he'd ever had in all these years teaching economics which is a pretty big statement because Hewson also called a number of other notable high achievers including the former head of Treasury Ken Henry.

Hewson was so impressed by Lowe that he said he fought very hard not only to get him first class honours but also to get him the University Medal, which he did. From there Lowe went on to do his doctorate at the Massachusetts Institute of Technology where his supervisor was Paul Krugman: Nobel Prize winner, New York Times columnist possibly the most influential economist in the world today. So he's certainly no dill and and has been associated with a number of other people who aren't dills either.

ELIZABETH:

What about personally? Do people say he's kind of a showboat? What's he like?

MIKE:

No, no he's he's humble he's softly spoken, catches public transport to work, if anyone asks him what he does he says he's a banker, tries to deflect attention generally; so he's been getting a lot of it but it's not because he's a showboat or because he's seeking publicity for its own sake.

ELIZABETH:

He became the RBA governor in 2016. How does that appointment process work? And kind of in simple terms, what does a Reserve Bank governor actually do?

MIKE:

He's appointed by the Treasurer for a seven year term, quite an independent appointment I might add, you know it's technically political but essentially the bank operates independently and it tends to be that there's an obvious heir apparent coming up through the ranks at the RBA. As for what the bank's supposed to do, it's essentially supposed to maintain the financial stability of the country and it does that largely by the setting of monetary policy i.e. official interest rates, of which other interest rates operate. So if the economy is running a little too strongly they think and inflation is getting out of control, they whack interest rates up a bit. If things are looking dire, they cut interest rates to try and stimulate greater economic activity.

ELIZABETH:

And what kind of Reserve Bank Governor has Philip Lowe proven to be?

MIKE:

Notwithstanding the fact that he's a pretty low profile guy he's umm, he's proven to be an uncommonly public one as it's turned out.

[Music starts]

MIKE:

Quite unconventional, and has given many, many speeches now publicly calling on government and business to do more to try to rescue Australia's economy which has been floundering a bit in recent years.

Archival tape — Unidentified female news reporter:

“The Reserve Bank governor has been pleading with the federal Treasurer to help boost the economy which would bring about higher inflation and higher wages. Governor Philip Lowe told a lunchtime gathering in Sydney he’s not going to push the government any more. But the nation’s economic problems are still no closer to being resolved.”

MIKE:

He's urged governments, both state and federal, to invest much more in building infrastructure and to do it more quickly.

Archival tape — Unidentified male newsreporter:

“The Reserve Bank governor Philip Lowe says the bank can only do so much to try and give the economy a kick along so he’s calling on the Morrison government to spend more money especially on big rail and road projects and bring the funding they’ve already committed forward.”

MIKE:

And he's told his political masters that they should get themselves moving on structural reform of the economy. He's even suggested that the government should boost welfare payments like Newstart allowance as a means of stimulating the economy. So these have been all quite politically charged statements.

Archival tape — Philip Lowe:

“But it does require the political classes to come together to agree on and support some structural changes. That’s completely out of the era of the central bank but...are we happy for things to be okay or do we aspire to something better?”

ELIZABETH:

So Mike what is Philip Lowe's relationship like with the government?

MIKE:

Polite but I would think possibly a little bit uncomfortable. When I was speaking to John Hewson about this he notes there's a general inclination on the part of the Morrison government to try to constrain the independence of the public service in general to make it more responsive to government but also perhaps to constrain the independents, traditional independents, the Reserve Bank. The Treasurer, Josh Frydenberg has floated the idea of changing the agreement between himself and Lowe which governs the relationship between the bank and the government, to require the bank to formally explain itself if it fails to hit its inflation target and this happens in Britain and some other countries but has not happened to date in this country.

ELIZABETH:

So there is tension there...

MIKE:

Oh yes, there's definitely some tension there. This government does not like being told what to do by the governor of the Reserve Bank. They would much prefer that he stuck to his last and looked after interest rates, I think.

ELIZABETH:

Does Australia have a precedent for an RBA governor that's as openly opinionated as Lowe has proven to be?

MIKE:

Well every so often they stick their heads up and make observations. But I spoke to Bob Gregory, and he's been around for a long time, has a very long memory.

[Music starts]

50 years I think it is since Gregory started teaching economics at the ANU and from 1985 he was on the Reserve Bank board for a decade, so he knows the Reserve Bank pretty closely too. He said he could not think of one. Ever. And he described it in his understated way as being very unusual, what Lowe had been doing. But he also made the points that these are highly unusual times and should be considered in that context.

ELIZABETH:

We'll be right back.

[Music ends]

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ELIZABETH:

Mike, Philip Lowe has been unusually outspoken as the governor of the Reserve Bank for the last three years. But he's, he's also working in unusual times. What makes this point in time so unusual, economically speaking?

MIKE:

Well what makes it particularly strange is that interest rates seem to have lost their power as an economic tool of management. They're already at historic lows. So if the economy softens any further, they don't have much room to move in providing monetary stimulus for the economy. We can see this in the fact that the economy has failed over and over again to hit the bank's target rate for inflation of 2 to 3 per cent. That target was set back in the 1990s and the original intention behind setting it, was to try and cap inflation which at the time was in danger of getting a bit on the high side. So that was the idea was that we would have this target and to meet it we would manipulate interest rates to keep the economy working, to keep wages and prices growing but not too fast. So, you know when things were going too fast they tapped the brakes a bit but now the brakes are almost all the way off in Australia we're down to one per cent and across much of the rest of the world they're completely off. Interest rates are at zero and in some places they're below zero.

Archival tape — Unidentified male newsreporter:

“In a move that surprised the financial markets, the European central bank has cut it’s main interest rate. It’s benchmark rate goes to zero from 0.05%...”

MIKE:

So there's very little that central banks can do, at least in the way they've traditionally done it. And economies are just generally looking fairly stagnant around the world.

ELIZABETH:

So what does it mean exactly when rates go below zero?

MIKE:

Well it means, it means that our notions of debt as we understand it or as we have traditionally understood, turned completely on their heads. And what it means is that commercial banks will pay central banks for the privilege of keeping their money with them. So you know you put money in the bank and instead of the bank paying you interest, you effectively pay the bank interest. In some eurozone countries now, banks pay people interest on their home loan. So you take out a loan with the bank to buy a house and the bank actually pays you a little interest on it. It's quite bizarre.

ELIZABETH:

This was discussed at a gathering of central bankers in Jackson Hole, Wyoming, recently and Lowe spoke at that event. What did he say?

MIKE:

He said that, not only are rates not as good as they were for stimulating the economy but they can actually have perverse consequences. So, as he put it, in times of elevated uncertainty we can't be confident that changes in monetary conditions will have the normal effect. So instead of stimulating productive activity, lowering monetary policy further simply increases the risk of asset price bubbles, of assets zooming in price without it being invested in anything particularly productive. And he said that, that was a potentially very uncomfortable combination.

ELIZABETH:

What does that look like? And what does it mean for there to be huge increases in asset prices?

MIKE:

In Australia, it seems to be happening just at the moment, in fact. In the wake of the RBA historic rate cuts a couple of months ago, consumer spending and business investment haven't really moved very much so the intent was to get people spending again, but that hasn't really happened. Instead though, housing prices have taken off, or they appear to have taken off, I mean it's only been a couple of months but things don't look good. And we see this problem everywhere. Even where rates are below zero and even where banks have resorted to unconventional measures such as so-called quantitative easing, the benefits of flowing into unproductive assets, you know houses, the share market instead of productive activity and instead of corporate risk taking. So essentially the people with lots of money are just sitting on it.

Only last week. Rob Capito, who's head of the world's largest money manager BlackRock, gave an interview to the Nine media when he was visiting Australia and he estimated there was something like 73 trillion dollars Australian in cash sitting idle around the world due to the lack of investment opportunities and due to weak returns. So people are just sitting on their money. And as this is happening a number of serious economists around the world are now predicting that, that there could be a US and global recession next year and a number of economists notably have said that this cannot be averted regardless of what is done with interest rates in America or anywhere else, that monetary policy is essentially not a relevant consideration in trying to deal with this stuff.

ELIZABETH:

So just to be clear that figure that everybody is sitting on is 73 trillion dollars. How does that compare to the size of the Australian economy?

MIKE:

Australian GDP currently is around 2.5 trillion dollars. So that is clearly much, much bigger than the whole of the Australian economy.

ELIZABETH:

And does this seem to say, uncertainty?

MIKE:

This says enormous uncertainty. You know there's all sorts of uncertainties in the world at the moment. I mean there's there's Brexit, there's Donald Trump's trade war with China, there's the rise of various populist governments in various other advanced economies who don't inspire a lot of confidence for investors. And then of course there's the situation in the Middle East, I mean we've just seen drone strikes on the massive oil installation in Saudi Arabia. There's a whole series of potential scenarios that I've seen various serious economists set out whereby everything could go to hell in a handbasket very quickly.

ELIZABETH:

So what, what's the solution to that uncertainty?

MIKE:

Well in his Jackson Hole speech, Philip Lowe suggested that it was time to pull on what he called the fiscal lever which is if businesses aren't spending, governments have to step in and take up the slack, which is you know pretty orthodox economic theory really. But he also conceded that that was difficult in a number of countries because the countries already had high levels of debt. But that's not really an issue for Australia in spite of what the Morrison Government says, Australia does not have a particularly high debt problem. And the other difficulty that Lowe suggested was that there was a lot of difficulty getting political consensus about what should be done in terms of spending and that most definitely is an issue here. The third potential lever he suggested was structural reforms to encourage firms to expand and invest and to innovate and to hire people. And he suggested that was probably the best lever. But he also said that that was hard to move or was stuck, as he put it, in many countries.

People aren't really sure what structural reform looks like anymore. Martin Parkinson, who left his job as head of the Prime Minister's Department a week or so ago in his valedictory speech, made the point very strongly that, whereas decades ago in the 80s and 90s we had a fair idea of what structural reform might look like, that is now much less clear and much more contested.

ELIZABETH:

Mike just to summarise that, we sort of don't really know what to do?

MIKE:

That, that's essentially right. A lot of people have different ideas about what might be done but there's very little consensus on any of them.

ELIZABETH:

So Lowe has this tense relationship with the government to a certain extent. Do we think that his view is going to get a hearing?

MIKE:

Not on current indications. This week in Parliament we saw the Prime Minister Scott Morrison and Treasurer Josh Frydenberg insisting still that they would stick to their plan of returning the budget to surplus so they gave no indication that they were about to ramp up spending in any particularly large way. So, it's possible they might speed up infrastructure spending a little bit. But you'd have to say that overall he seems to be crying in the wilderness.

ELIZABETH:

So we can expect this relationship to become more difficult - not less...

[Music starts]

MIKE:

I think if things go seriously bad, the government will be looking for various fall guys. And I suspect, and a number of the economists I spoke to suspected also, that if things go bad they will point the finger at the Reserve Bank and say ‘see they weren't doing their jobs properly and that's why we didn't get enough inflation and that's why our budget surplus is under threat’. So I think to some extent the economic circumstances will dictate it. But I think that ultimately, if things go seriously bad they will be looking for someone to point at.

ELIZABETH:

Mike, thank you so much.

MIKE:

Okay. Cheers.

[Music ends]

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[Theme music]

ELIZABETH:

Elsewhere in the news:

On Wednesday, Pauline Hanson was met with outrage from anti-domestic violence groups after she claimed that women routinely lie about experiencing abuse to benefit their claims for custody. This follows the Prime Minister's surprise announcement earlier in the week of a parliamentary inquiry into the Family court, after years of pressure to do so from Hanson and One Nation. The inquiry will look at the threshold of proof required to receive an apprehended violence order and how false claims might be used against an individual. The year-long inquiry will be led by former Social Services minister Kevin Andrews. Hanson is likely to be appointed its deputy chair. On Wednesday afternoon, Centre Alliance Senator Rex Patrick said that his party would support the motion for the inquiry.

And in NSW, the Independent Planning Commission has denied an application to develop a coal mine near Mudgee. The $290 million proposal was rejected due to environmental concerns, including its potential to contribute to climate change. The decision stated that the developer had not done enough to mitigate emissions and that the project quote, "not in the public interest."

This is 7am. I’m Elizabeth Kulas. See you Friday.

[Theme music ends]

Philip Lowe is the governor of the Reserve Bank. By all accounts, he is a conventional person who’s been pushed by the economy to make unconventional choices. Mike Seccombe on how rate cuts no longer stimulate growth, and how Lowe’s office became political.

Guest: National correspondent for The Saturday Paper Mike Seccombe.

Background reading:

Philip Lowe and Australia’s economy in The Saturday Paper
The Saturday Paper
The Monthly

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7am is hosted by Elizabeth Kulas. The show is produced by Emile Klein, Ruby Schwartz and Atticus Bastow. Our editor is Erik Jensen. Our theme music is by Ned Beckley and Josh Hogan of envelopeaudio.com.au text: Envelope Audio).

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rba morrison lowe bank auspol economics interestrates




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83: What’s eating Philip Lowe