‘Not exactly what was agreed’: Inside the Greens’ RBA demands

Greens Senator Peter Whish-Wilson is not talking about his party’s insistence the treasurer override the Reserve Bank and cut interest rates immediately.

Conspicuously not talking.

Other members of the Greens party room are, albeit only on background. It is Whish-Wilson’s silence, however, that speaks most loudly to concerns about the position taken by Nick McKim, the party’s current spokesperson for economic justice and treasury.

Whish-Wilson is a person with serious credentials when it comes to economics and finance – one of two in the federal Greens, alongside Barbara Pocock.

He holds a master’s degree in economics. For nearly eight years, until he entered federal parliament in 2012, he taught university economics. Before that, he worked as a banker and broker for more than a decade, with Merrill Lynch on Wall Street and Deutsche Bank in Hong Kong.

Whish-Wilson also was the Greens spokesperson on finance from May 2015 to August 2016, when he became the treasury spokesperson – a position he held until September 2020, when he was shuffled out by new leader Adam Bandt.

All of which suggests he might have pertinent observations to make about the party’s insistence that politicians are to be trusted more on interest-rate setting than the econocrats of Australia’s central bank. The fact Whish-Wilson is politely but firmly refusing to comment suggests he does not view it positively.

Certainly others in the Greens party room are uneasy about the line McKim has taken.

Central to their concerns are a couple of the 51 recommendations made in an independent review of the RBA’s operations, released in April last year, since taken up in proposed legislation by the Albanese government.

The review advocated the abolition of section 11 of the Reserve Bank Act, which provides that the treasurer can overrule a bank decision. The somewhat convoluted process includes a requirement that the bank produce “a statement in relation to the matter in respect of which the difference of opinion has arisen”.

No treasurer has ever used the power, perhaps in part because of this requirement – which would undoubtedly bring an embarrassing public stoush – and because Australia has not experienced a major economic crisis in which the bank and government were seriously in conflict. Most importantly, though, most serious politicians, and certainly economists, understand that to override a central bank decision on interest rates for political purposes is to destroy the credibility of the country’s monetary authorities – a powerful deterrent for foreign investment.

The review also recommended removing section 36 of the Banking Act, which allows the RBA to direct how the money it advances to commercial banks can be allocated.

McKim wants both sections to be retained, and his Senate colleagues have gone along with him on this.

“This was a partyroom decision that was arrived at through the normal processes – recently, within the last couple of weeks,” McKim tells The Saturday Paper.

Another source says there had been “differing views” expressed in the meeting, but it was nonetheless decided the party would block the RBA reform legislation in the Senate until interest rates began coming down. Then it would wave through most of the changes, so long as those two sections were retained.

McKim went further, however. He publicly demanded not just section 11 be retained in case of some future crisis but also that the government should immediately use it.

“That was not how some of us expected it to be announced,” the source says.

“We do think that the government should retain that power, but saying that the power should be used now is not exactly what was agreed.”

Of course, it would not have been possible for the Greens to hold the RBA changes hostage without the cooperation of the Coalition parties, in an alliance of political convenience the prime minister has taken to calling the “Noalition”.

Apart from the RBA legislation, this alliance is frustrating a number of other government proposals, and there is concern among some in the party room that Albanese’s characterisation of the Greens as obstructionist is cutting through.

There is some basis for those concerns. A Guardian Essential poll this week found just 22 per cent of respondents, and only 20 per cent of Greens voters, supported the blocking of two proposed measures to address the housing crisis – the Help to Buy and Build to Rent legislation.

Why, in this context, would the party want to bring on another fight by demanding what one headline this week described as a “hostile takeover” of the RBA’s most important function – the setting of interest rates?

Ideology is part of it. When it was put to McKim in an interview with the online news site Crikey this week that he was “pretty alone” in his demands, he said: “I can’t help it if the neoliberal worms have consumed the minds of other people, that’s their problem, not mine.”

He is not taking a backward step. On Tuesday, just a few minutes after the announcement that the RBA board had decided to leave the cash rate unchanged at 4.35 per cent, because underlying inflation was still unacceptably high, McKim put out a media release, noting Chalmers’ recent observation that high interest rates were “smashing the economy” and pointing out, again, that the treasurer had the power to intervene and cut rates.

“Labor cannot keep standing on the sidelines and let people continue to suffer,” he said.

“Dr Chalmers has the power to bring relief to those who badly need it – he just needs to show some courage.

“Labor is watching the Reserve Bank drive people to the wall and doing nothing.”

Speaking to The Saturday Paper a few hours before the RBA’s rates announcement on Tuesday, McKim predicted what would happen: the central bank would not lower rates and the government would respond with “the usual ritual of ashen-faced hand-wringing … where they go out and pretend there is nothing they can do about it.

“It’s theatre. It’s a theatrical performance that has no basis in reality whatsoever.

“We are saying that interest rates should be cut at least by 25 basis points now; i.e. Jim Chalmers should intervene,” McKim said.

“The Reserve Bank is not independent. It never has been, and section 11 of the Reserve Bank Act proves that conclusively. The so-called independence of the Reserve Bank is just a great big lie told by Labor and Liberal treasurers over decades.”

His prediction was correct: the bank did not lower the cash rate and Chalmers responded in the usual way. At a media conference in Queensland after the RBA decision, the treasurer uttered variations of the “i” word seven times in the space of a minute in response to questions.

“I don’t second-guess decisions taken by the independent Reserve Bank. I’ve made that very clear repeatedly,” he said, going on to stress the government’s stalled legislative changes “have been about trying to make the bank more independent, not less independent. I respect and cherish its independence.”

Others question this.

Among the government’s proposed changes – following from the RBA review – is that the bank should have two boards, with one, a monetary policy board, continuing to set interest rates, while a separate governance board dealt with internal affairs. The review also said the monetary policy board should include more people with actual monetary policy expertise.

The shadow treasurer, Angus Taylor, has claimed Chalmers would use the restructure to “sack and stack” the board – removing current members and appointing Labor-aligned replacements. He has maintained his opposition despite written assurance from Chalmers that all current board members would have the option of staying on the new monetary policy board.

https://www.youtube.com/watch?v=un3x7orXSeY&ab_channel=TheSaturdayPaper

Disputes over appointments to the RBA board are nothing new, notes Senator Barbara Pocock, the other Greens senator with serious economic credentials – including a PhD, prior RBA experience, a long list of board appointments and a half-dozen books to her name.

The party not in power regularly questions the allegiances of new appointments to the board, she says. “You know, is it Bill Kelty or is it the head of the Australian Industry Group?”

Appointments are political in the broader ideological sense, she says.

“Neoliberals have been very well represented for the last 30 years on the bank’s board,” says Pocock.

“I was a fresh economics graduate when I worked at the RBA in the early 1980s and I was a long way from the machinery of interest-rate setting. However, I’ve been under no illusion for 40 years that interest-rate setting by the Reserve Bank is a political exercise,” says Pocock. “To say that it’s all above politics and there’s some kind of completely independent machine that sets interest rates – that’s not true.”

 

 

Richard Denniss, another economist of the left and executive director of The Australia Institute, also questions the independence of the RBA.

“This is a statutory body that gets a letter from the treasurer telling it to target inflation at 2 to 3 per cent,” he says.

“In fact the act that set the RBA up refers to currency stability and full employment. Inflation doesn’t get a mention.”

If the bank doesn’t raise rates enough, inflation gallops. If it raises them too much, the economy tanks and people lose their jobs. A mistake will have powerful political consequences.

The question is whether we would get better outcomes if the decision was taken out of the hands of the RBA and given to actual politicians, as McKim wants. Are circumstances really so dire as to warrant such a radical move?

I put it to McKim that Australia is not the Weimar Republic, or Argentina, where inflation is currently running at an annualised rate well above 200 per cent.

“Well, you’ve got the governor of the Reserve Bank out admitting that people, some people, are going to have to sell their homes. A lot of Australians are actually in crisis at the moment. I think that’s beyond doubt. And high interest rates, or relatively high interest rates, are a significant contributing factor to that.” 

High rates, he correctly says, cost jobs and result in a “mass transfer of wealth” from mostly younger people with debts to mostly older people with financial assets. And they pad the “already eye-watering profits” of banks.

He stresses he does not blame the RBA.

“You’ve got a situation now where the government of the day is refusing to pull the levers it has at its disposal to bring down inflation.”

He ticks off a list of things the federal government could do that might obviate the need for the RBA to whack people with the blunt instrument of high rates.

It could make price gouging illegal. It could put in place a super-profits tax “to disincentivise corporations jacking up prices”. It could work with the states to freeze rents. It could curtail the “extremely generous” superannuation tax breaks.

“If the government and the treasurer would actually step in and do their job and pull the levers they have to bring down inflation, then interest rates would not need to be as high as they currently are,” says McKim.

“I understand that what we’re proposing is unorthodox. I absolutely understand that. We are unashamedly pulling the RBA into the political debate.”

His leader, Adam Bandt, likewise recites a list of measures other than overriding the RBA – he mentions putting in place divestiture powers to break up gouging supermarkets, price controls and tax measures such as reforming negative gearing – that the Greens believe would control inflation in a more equitable way.

“For us … this isn’t some kneejerk move or simplistic attack on the RBA,” says Bandt. “We’re thoughtfully arguing there’s a massive economic and inequality crisis that right now is so bad it demands more intervention from government, rather than the major parties’ neoliberal ‘hands off’ approach.

“We’re calling out the crap from Chalmers and Swan, who attack the RBA and say, ‘Oh, it’s terrible that the RBA is smashing the economy, but there’s nothing we can do about it’, when in fact the RBA is doing exactly what they asked it to do.

“We’re saying government needs to tackle the problem at its source, stopping the huge rises in the price of essentials, like groceries, utilities and housing, which are right now driven by profiteering, not higher input costs.”

This rather suggests the Greens – maybe not including Nick McKim – are not really serious in their demand that Jim Chalmers takes monetary policy control off the RBA. Rather, they are using it to make a point about fiscal policy – and, of course, to make political capital.

As one party source says: “The politics of it is … people don’t know what these changes are about, but they’re bloody pissed off about their interest rates.”

It’s a high-stakes game. No wonder Peter Whish-Wilson has decided not to play.