Originally posted by nic
Could anyone explain why the Labor government did what they did in late 80s with the interest rates and why we had "the recession we had to have" as well as why you think it won't happen again if Labor came to power?
Why the ALP did what they did with interest rates
The 80's were arguably the most economically busy times in recent history.
In Australia we had the floating of the dollar, the deregulation of the financial sector, the emphasis on external balance as a policy goal (our CAD), and top it off, microeconomic reform.
Though you don't hear much about it now, in the 1980's the big economic news was the Current Account Deficit (CAD) and Foreign Debt (the latter is simply the sum total of the former).
In the late 80's Australian consumers developed an almost insatiable taste for foreign goods (imports) and our CAD went ballistic. The government's response to this growing consumer demand was to raise interest rates - after all this would stop consumers from spending.
No such luck.
Unfortunately what happened was that individuals kept borrowing, but businesses stopped.
Enter stage right - the recession we had to have.
The recovery from that recession was a lot slower and more painful than might otherwise had been the case had Australian businesses kept updating and expanding their capital.
Why we had the recession and why it was so bad
There are probably a few factors that contributed to why we had the recession - but only two main ones:
1. Interest rates being held too high for too long (see comments above)
and
2. Microeconomic reform.
MR is the process of removing "barriers" to the efficient allocation of resources.
That is economists speak for slashing tariffs, removing quotas and subsidies, reducing barriers to entry and so on.
In Australia MR also became known as "structural reform" because an inevitable consequence of MR was that the structure of the economy would change. Industries such as TCF (Textiles, Clothing and Footwear) had their protection removed and were increasingly exposed to international competition > job losses > change in the structure of the economy.
It is unfortunate that the structural change largely bought about by MR also coincided with sh*thouse macroeconomic management > the worst recession in 60 years.
Still, all things considered, this nation is better for the experience.
Why not again under Labor?
That you even ask that question illustrates my point.
Thing is, everyone expects them to screw up the economy again. It is the stuff of legend that the ALP couldn't manage an economy out of a wet paper bag.
In the 80's, the ALP
owned the RBA and Paul Keating certainly exercised an inordinate amount of influence over the RBA during his term as Treasurer - extending well into his time as PM via the then Governor Bernie Fraser.
IMHO, under Ian McFarlane the RBA has regained some of its independence.
Since 1996, the Commonwealth Government and the RBA have had a "Statement on the Conduct of Monetary Policy".
Second Statement on the Conduct of Monetary Policy - 2003.
And I quote from the Second such statement (see above):
"The Government recognises the independence of the Bank and its responsibility for monetary policy matters and intends to respect the Bank's independence as provided by statute."
Sounds good.
"Section 11 of the Act prescribes procedures for the resolution of policy differences between the Reserve Bank Board and the Government. The procedures, in effect, allow the Government to determine policy in the event of a material difference; but the procedures are politically demanding and their nature reinforces the Bank's independence in the conduct of monetary policy. Safeguards like this ensure that monetary policy is subject to the checks and balances inherent and necessary in a democratic system."
Ok.
So what they are saying here is that the RBA is independant but the Government determines policy in the event of any material difference.
IMHO, we have not seen an material difference in recent years - hence the RBA has basically been able to do its own thing.
But, a situation where mortgage interest rates have the capacity to be at 10+%?
That is probably a material difference.
To the RBA it matters little - they don't have to get re-elected (though to do face re-appointment). However, the political implications of 10% interest rates are massive and I suspect the ALP (or Coalition) would take charge of matters long before it came to that.
There is a touch of irony in what I am saying.
It is a matter of public record (John Edwards book on Paul Keating) that when Keating, Treasury and Fraser were saying that rates should go higher (to 17+%) that Ian McFarlane, who was then only an Assistant Governor, was saying that rates should fall.
At that time the ALP used its influence to raise rates.
Only now, I am saying that if it came to the crunch, the ALP (or the Coalition) would use their influence again - this time to keep rates down below a certain level.
MB
) but seriously, It's really still 'taking off' as a City, and I know I have been saying this for a while, but last Nov I predicted that the market in BNE still had about a third to go, price wise.
