During the Global Financial Crisis there was a splash of taxpayer’s funds bigger than school halls, pink batts and $900 cheques combined. But it was a cash splash that no one knows about, because it was done by a part of government that has zero accountability to ministers, the parliament or the public.
From September 2008 to July 2009 the Reserve Bank agreed to borrow US dollars from the US Federal Reserve so it could on-lend them to local traders on concessional terms. The purpose was to boost US dollar liquidity in the East Asian time zone. At its peak, the Reserve Bank provided $AU41 billion to the US Federal Reserve under this agreement.
In acquiescing to the US Federal Reserve in this way, the Reserve Bank chose not to invest taxpayer funds to maximise returns relative to risk. A conservative estimate suggests this may have cost taxpayers half a billion dollars compared to the alternative returns available.
It is possible the Reserve Bank’s actions were in Australia’s interests. Alternatively, they may have been nothing more than industry assistance or even a favour for the US Federal Reserve. The point is, the Reserve Bank never outlined the cost, nor provided a lay explanation of its actions. It never needed to; the Reserve Bank answers to no one.
With the power of the printing press, the Reserve Bank pays its staff as much as it pleases, then chooses whether or not to pass on any excess funds to the government.
The Senators on the Senate Economics Committee are too intimidated to ask it to turn up to Senate Estimates to be quizzed on its activities. And when the bank appears before a House of Representatives Committee, we see officials speaking in complex terms, and fawning politicians nodding soberly rather than asking for answers that can be understood.
The Reserve Bank and our politicians should bear in mind what Einstein said: ‘If you cannot explain it to a six year old, you don’t really understand it.’
The Reserve Bank is also subject to no real legislative constraints. Even though the Reserve Bank Act of 1959 requires it to target currency stability, the bank (wisely) chose to target price inflation in 1993. Even when the government declared in 1996 that the Reserve Bank should indeed target inflation, it didn’t bother to update the Reserve Bank’s legislation to this end.
This is a concern, because the Reserve Bank’s ability to create inflation is akin to a power to tax. After all, inflation reduces our purchasing power just like tax. The Reserve Bank’s legislation should be updated to set out how much inflation the government and parliament expects.
The Reserve Bank’s legislation should also ban it from undertaking activities beyond inflation targeting. We don’t need the Reserve Bank to have a standing power to bail out banks. It is scandalous that the Reserve Bank has the potential to bail out a bank, at a cost to taxpayers of hundreds of billions of dollars, without prior approval from the elected government or parliament.
We also don’t need the Reserve Bank to play with the exchange rate, which is supposed to float. Nor do we need it to regulate banks — APRA, ASIC and the ACCC already do this. And we don’t need the Reserve Bank to invest funds on behalf of the government — we have the AOFM for that.
We should set the rules for the Reserve Bank as if it were staffed by its fair share of lazy and stupid bureaucrats. While the officials currently in control of the Reserve Bank seem conscientious and smart, this will not always be the case.
We should make the Reserve Bank accountable through legislation. Moreover, it would be best if the Reserve Bank sought regular budget funding from the parliament to pay for its staff and overheads.
This wouldn’t threaten the independent implementation of monetary policy. We get independent tax administration by the Tax Commissioner, and independent collation of statistics from the Australian Statistician, even though they both lead agencies subject to legislation and a budget appropriation.
And we should insist the Reserve Bank justify its actions to taxpayers, whose money it lends to others without informing them.
For Markets and Money
Editor’s Note: David Leyonhjelm is a Senator for the Liberal Democrats.