RBA Governor Glenn Stevens is leaving the economy in good shape. Photo: Louie DouvisThanks, Governor.
Reserve Bank supremo, Glenn Stevens, will vacate the big chair in just over a week, having been at the helm during one of the most challenging economic periods in living memory, and has come out of it with the regard of economists, central bankers, politicians and investors — no small feat, given the fractious nature of each of those groups… let alone trying to have those groups agree with each other on anything.
Oh, not everyone agrees, of course. But then, we’re all armchair experts. We opine with the luxury of knowing our opinions will never be tested in the real world. Generally, though, it’s hard to find many people who have a real and abiding disagreement with the way Stevens has run the central bank.
It’s something of a thankless task. Stevens worked for a small fraction of what he could have earned in business. He was scrutinised on an almost-daily basis in our media, and had submit to grillings by parliamentary committees. And, lest we forget, he has precisely one real tool in his toolkit — the official cash rate.
Compare that to the federal Treasurer of the day. He has income tax, indirect taxes, welfare programs, government rebates, industry assistance, procurement policy and scores of other tools at his disposal. Having too many options may be a curse in itself, but Stevens (and his replacement, the incoming governor, Phillip Lowe) has a single lever, with only three positions: hike, hold or cut.
A blunt tool
And here’s the thing: Stevens knows just how blunt that tool is. Cutting rates lowers the cost of borrowing, and so stimulates business investment. But he also knows that it adds fuel to an already overheated housing market, and significantly reduces the incomes of retirees. Plus, he has to think about the impact on business and consumer confidence, the exchange rate, and the fact that changes tend to take three to six months to really roll through the economy, so he needs to be part-forecaster, too.
Of course, he also has the most talked about skeletal feature of any public figure in the country: the fabled jawbone. As well as setting official policy, Glenn Stevens spent countless hours giving speeches and answering questions, knowing that his comments would be analysed and picked over. Both a blessing and a curse, one of his early attempts at humour was completely misunderstood by investors and traders who, frankly, really should get out more. But he turned that to his advantage, taking opportunities to comment, however obliquely, on the exchange rate, lending policy and — even more obliquely — giving a little advice to the Treasurer.
His appearances in Canberra were always fun to watch (well, if you like that sort of thing). With the wit of someone who knows the impact of their words on the market, Stevens’ answers — and more frequently his non-answers — both delivered with a wry, knowing smile are the stuff of legend.
A vital cog
Glenn Stevens steps down as Governor just as Australia celebrates its 100th consecutive quarter without a recession — a result that’s bettered only by one country, the Netherlands. That’s a record we’re likely to break by this time next year. That success is in part a result of thoughtful government policy (think: reforms that made our economy more flexible and resilient) and in part due to our geographic and natural resources luck — we had what China wanted, even as the rest of the world slumped into the GFC.
He played a critical role during that period, too — both by being prepared to cut rates, hard, when needed, but also to instill that most precious and important factor: confidence. While most people focus on the economic statistics — GDP, exports, spending and the like — these are outputs. In today’s globalised and services-heavy world, the single most important element of our economic circumstance is confidence. Without it, our wallets snap shut and the economy plunges into recession. That we avoided recession in 2008 and 2009 is, in very large part, a result of the faith Australians had in our economic circumstances, and the man with his hand on the rates button.
Governor Stevens will leave his post with an economy in very good shape, thanks in part to his management of interest rates. But it’s not without risk. House prices are high, thanks largely to the availability of cheap credit. Central bank governors’ reputations are solidified in the years after their terms end, and a housing crash could well tarnish Stevens’, just as the low rates and low regulation sullied US Fed chief Alan Greenspan’s.
Still, based on what we know today, Glenn Stevens can leave his post with his head held high. He may not be solely responsible for our economic well being, but he has contributed meaningfully to the Australian economy we enjoy today.
Go well, Governor, and thank you.
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Scott Phillips is the Motley Fool’s director of research. You can follow Scott on Twitter @TMFScottP. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).