Thursday, March 19, 2020

Today by Paddy Manning

Rolling crisis
The Reserve Bank takes extraordinary measures

© Joel Carrett / AAP Images

The well-flagged-but-extraordinary measures announced by the Reserve Bank today, including an emergency cut to the official cash rate to 0.25 per cent, and the commencement of quantitative easing scheduled for tomorrow, will be addressed by governor Philip Lowe in a press conference late this afternoon. The statement notes that in recent volatile trade the functioning of major government bond markets has been impaired, and “funding markets are open only to the highest quality borrowers”. As ABC business editor Ian Verrender has highlighted, a key question is whether the RBA is losing its domestic rate-setting ability – as he wrote on Monday, while the official cash rate has been cut and cut, money-market interest rates have surged since last week. “Money has become scarce and lenders scared,” Verrender wrote, raising the spectre of a financial crisis redux. When lenders panic and credit dries up, businesses will start hitting the wall whether they are in sectors highly exposed to the COVID-19 pandemic or not.

Today the RBA also announced a $90-billion funding facility for the banking system, with particular support for credit to small- and medium-sized businesses. Ahead of the announcement, shadow assistant treasury spokesperson Andrew Leigh told me that the RBA’s embrace of quantitative easing (QE) was “the right approach, which is why it’s been pursued by governments around the world. You’ve seen a whole lot of creative solutions, one of which the Bank of England has pursued, to provide greater incentives to banks to loan to small- and medium-enterprises, through their QE policy – I think that’s a really creative way of ensuring that funding flows where it’s needed the most.” This is precisely what the RBA has done.

Leigh is in no doubt that QE will have the desired stimulatory effect. “We know a lot more about QE now than we did a decade ago, and it’s clear that the bond market was in some serious strife last week, and indeed that’s yet to be over. So just focusing on government bonds wouldn’t be sufficient. Central banks around the world are looking at purchases of corporate bonds, ensuring that those debt markets are propped up.” The RBA does not appear to have taken that step today.

As the Australian dollar tanks and with the share market still falling, the markets now will wait on the government’s second stimulus package. The Australian Financial Review reported [$] this morning that this second package will include “survival” payments for those laid off during the pandemic – those payments will be paid at a higher rate than Newstart, in tacit recognition that the social security payment is not enough to live on. Why the government refuses to raise Newstart, given the economic case and weight of support for it, is inexplicable.

It is an extraordinary moment, and yet it is still possible to go over the top, as some Macquarie Bank analysts seem to have done overnight, indulging in the economists’ equivalent of panic-buying. “Conventional capitalism is dying” was the headline of The Australian’s story [$] this morning, citing two Macquarie notes arguing that trillion-dollar stimulus packages being announced around the world showed governments were shifting towards “neo-Keynesian” and Modern Monetary Theory policies, “mutating into something that will be closer to a version of communism”.

That’s “a little hyperbolic”, says Leigh. “The actions of central banks and governments around the world seem like textbook Keynesian economics to me … all the more so when we know that within a year or two we’ll have a vaccine for this virus; it makes eminent sense for central banks and governments to step in to support aggregate demand.

“Modern Monetary Theory in part argues that we don’t need to worry about deficits. I think people in treasuries and central banks around the world are concerned about deficits, but they recognise that there’s a critical role for government to step in at a time when there is a temporary shock coming.

“The challenge here is about making sure that this shock is disruptive rather than destructive. The right level of the stimulus needs to be determined by the shock that’s coming. The fact that we face lower interest rates means that there’s less firepower for monetary policy, but it also means the borrowing costs for governments are lower, so the opportunity cost of taking on increased debt is lower.”

Leigh says of the large New Zealand stimulus package (4 per cent of GDP), Swedish package (6 per cent) and the German “bazooka” approach of offering unlimited lending to all firms, “All of that makes sense. There’s no reason why someone should lose their job, there’s no reason why a business should go broke, because of a virus whose vaccine will be here within a year to two years.”

“This isn’t like the Great Depression, in which there was a spiral downwards and there was a real uncertainty about what the path back would look like. In the Great Depression, the trajectory is a big drop and then a really slow return to trend. Here, we ought to be able to get a V-shaped recovery or ideally a recovery where growth is almost shooting straight back up. Where, when it’s safe to do so, people are filling the restaurants, the aeroplanes and the economy is getting going so it’s a temporary shock, we know it’s a temporary shock and it’s absolutely right to use government to support the economy at that stage.

“This is why Keynesian policy was developed. This is why we have governments and central banks.”

Prime Minister Scott Morrison welcomed the RBA’s decisions at an unscheduled press conference late this afternoon, and said they were totally consistent with the government’s own actions, including a further $15 billion for smaller lenders, announced separately by the treasurer today. He announced further travel bans, and flagged that the second stimulus package will be revealed within days. Treasurer Josh Frydenberg confirmed the details of the package were being finalised right now, and acknowledged that “the situation has changed – it’s got much more difficult across the economy since even two weeks ago. Our focus has always been on getting to the other side, and getting Australians to the other side.” 


A message from our publisher.

“It is not acceptable that one day after the airline industry was provided with a $715 million taxpayer-funded bailout package, Qantas has told its workforce that protecting their pay and their jobs is not central to its plans. In every other country where taxpayer money is being used to assist industries we are seeing government, business and working people, through their unions, sitting at the same table to work out how best to protect jobs and business.”

The ACTU president lashes Qantas over its announcement today that two-thirds of its workforce would be stood down.

“The one thing we’ve been very clear on is we’re permitted up to 60 million tonnes [MT]… Sorry, are you recording that? Or you’re… no? Okay. We’re permitted up to 60MT, so the reality is we’ve got an opportunity to be able to expand beyond that.”

Adani executive Lucas Dow, recorded in video obtained by the ABC, suggesting that Adani intends to expand its Carmichael project, and, if other mines go ahead in Queensland’s Gallilee Basin, may export a combined 100 million tonnes of coal a year.

Ten questions about coronavirus
As the coronavirus outbreak continues to grow, many in the community are still unclear about the virus’s symptoms, how they can keep themselves safe and what kind of responses will be the most effective. Today, Rick Morton answers some of our basic questions about coronavirus.


The number of journalists made redundant at Fox Sports, announced late yesterday. This is another blow to the media after the recent announcement that AAP will close on June 26.

“The investigation will look at the administrative decisions the AFP made and actions they took. It will consider if these were lawful, reasonable and just in all the circumstances.”

The Commonwealth Ombudsman will scrutinise the Australian Federal Police over its investigation of how federal minister Angus Taylor put his name to an allegedly forged document to discredit Sydney Lord Mayor Clover Moore. Crikey reports that the Ombudsman received more than 100 complaints over the matter.

The list

“The global coronavirus pandemic is escalating so rapidly that an observation made in the morning is likely to out of date by the afternoon. I don’t think it’s an exaggeration to say, however, that the material conditions of artists and arts workers nationally, and globally, are being destroyed by this pandemic. An industry that relies on people being able to gather is wholly vulnerable in a time when no one can gather.”

“‘For six years,’ says Wayne Swan, ‘there virtually wasn’t a day where they didn’t pour shit all over me, telling lies about the effectiveness of the stimulus.’ The former treasurer, who saw Australia through the global financial crisis, feels he’s entitled to express a little righteous indignation just now.”

“It happened in broad daylight, one April afternoon in 2015, while the citizens of an outer-western Melbourne suburb called Wyndham Vale were peaceably going about their business. A chef, on her way to get a tattoo, was driving past Lake Gladman, a reedy, rock-edged suburban wetland, when the blue Toyota SUV in front of her suddenly pulled off the bitumen and stopped on the gravel. As the chef drove by, she caught a glimpse of an African woman sitting huddled over the steering wheel with her face in her hands.” 

Paddy Manning

Paddy Manning is contributing editor (politics) at The Monthly and has worked for the ABC, Fairfax, Crikey and The Australian. He is the author of Body Count: How Climate Change Is Killing Us, Inside the Greens and Born To Rule: The Unauthorised Biography of Malcolm Turnbull.


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