RBA Review: Moonage Daydream?

After watching the brilliant documentary Moonage Daydream, I wondered about the meaning of the lyrics of the title song. Like most Bowie songs, fans came up with many different theories. All seemed plausible for parts of the song, but didn't really fit overall. I concluded that Bowie, as he often did, just cobbled together numerous abstract ideas he had scribbled on small bits of paper that fitted with the music.

Reading the RBA Review, and the many commentaries on its significance and merits, I reached a similar conclusion. The background music criticising the RBA over the past year or so was a very catchy tune that needed the right lyrics. The Review panel dutifully delivered.

Bowie famously said that “I’m amazed that people take what I say seriously. I don’t even take what I am seriously...I try to give audience what they want". Should we take the RBA Review seriously, or did it just give the critics what they wanted?

At the highest level, it seems like the recommendations aim to make the RBA more like the Fed and the BoE. Fewer meetings, more press conferences. Fewer political cronies, more expertise in monetary policy. Next level down, the objective seems to be fixing the culture. Better leadership, more intellectual challenge. Less reliance on simplistic economic modelling. Finally, there is some basic housekeeping, with a new independent chair and board responsible for organisational performance, operational matters, and implementation of the recommendations of the review.

There is much glowing praise in the report for the great institution and its alleged successes in delivering financial stability and economic prosperity. But such praise is at odds with the radical nature of the recommendations. And, although some will laud the objectives of price stability and full employment being given equal weight, one does wonder how, and over what time frame, this nirvana will be delivered, with the limited policy tools at the RBA’s disposal.

But what is most strange about the report, is that the real issue facing the RBA (and every central bank) - namely, whether they are actually they able to control inflation - is nowhere mentioned. Perhaps this is because the august individuals conducting the review, and those many experts and interested parties that made submissions, suffer from the same “group think” that the Governor, the Board, and staff of the RBA are accused.

Was the RBA really the only central bank that gave misguided "forward guidance" about interest rates, or argued inflation was "transitory"? Was Governor Lowe the only central banker to allegedly cross-the-line in private remarks? Is the RBA the only central bank using grossly inadequate and dated DSGE models and Vector Autoregression techniques?

For more than a decade, central banks tried to boost inflation, for fear of deflation, and succeeded only in fueling the biggest asset price bubble in recorded history. Every time financial markets wobbled, they cut rates and printed money, implicitly underwriting excessive risk taking. When inflation emerged again, all they could do was hope, or try to convince us all, that it was “transitory”. To date, rate hikes of a speed and magnitude not seen for decades, have failed to do the job. When the full effect of this tightening cycle hits home, later this year or in 2024, maybe they will succeed. But one suspects that the global economic carnage of shifting rates so swiftly from near-zero to 4 to 5 percent will have profound economic and geo-political consequences.

David Bowie, in a serious moment, said “The inability to accept chaos…is [human]kind’s greatest failing”. ?Perhaps the one positive to emerge from the resurgence of inflation, and such a rapid exit from the era of free money, will be owning up to the truth that monetary policy cannot "control" anything, except in academic papers and economic textbooks. All monetary policy can do is attempt to influence outcomes, at the margin, by applying common sense to analysing this complex, chaotic and evolutionary world we live in.