Has Phil been a naughty boy?

Wide ranging review announced for RBA

In today's headlines comes the Treasurer's wide ranging review of the RBA. Not entirely out of the blue and there've been hints and snippets for some time now.

Has Phil been a naughty boy?

Most likely not. But there are some interesting aspects to all this.

Dr Lowe is an RBA "lifer" having joined straight out of school from Wagga Wagga NSW, and into a clerical position position at that.

He then steadily climbed the ranks all the way to Deputy Governor in 2012, and eventually the top job, nominated by Scott Morrison (at that time Treasurer), in 2016.

He's had postings at the prestigious Bank of International Settlements (BIS) also referred to colloquially as "The Banker's Bank" in Switzerland. And completed a PhD at MIT under none other than the Nobel Economics Prize winning Paul Krugman.

Krugman is at the very least a somewhat Keynesian, New-Keynesian oriented thinker, and much of Lowe's own earlier research focussed heavily on imbalances and the notion that central banks needed to keep a close watch on asset bubbles and use policy to prick them if/when required.

In fact it was some of this research that drew the attention of the BIS in Switzerland in the first place.

Further, in 2002, he and fellow BIS economist Claudio Borio published a paper arguing the risk of a financial meltdown greatly increased after long periods of rapid credit growth and surging asset prices. They proposed that central banks should use interest rates to safeguard financial stability by ensuring asset-price bubbles did not get out of control.

This very research itself, was actually overwhelmingly confirmed and validated a few years later, during the 2008 financial crisis.

Given all this, how did Phil get it so wrong?

Firstly, he's just presided over the penultimate "period of rapid credit growth and surging asset prices" through fiscal stimulus (nearly 400 Billion AUD of bond purchases) and low (dare I say "Lowe") interest rate policy.

But secondly right through to February this year, he steadfastly maintained there'd be no interest rate increases until late 2023 or more likely into 2024, 2 years from now.

Then in February the sudden concession that a rate hike was "plausible".

I thought avoiding this precise scenario was his super-power, or at least technical speciality. There's more than a few sceptical mortgage holders at this point.

The terms of reference for the aforementioned enquiry are interesting. Along with all of the usual policy mechanisms and inter-departmental assessments are more abstract considerations including morale and "culture"...

There's no doubt Dr Lowe is a very smart guy, and don't be at all surprised to see him re-appointed in September next year, as far fetched as that might seem right now.

In the meantime, there will need to be some credible answers or at the very least an earnest effort seen trying to find them, and that might just be at the core of what this enquiry is all about.