Terry McCrann: The RBA is in foreign territory but its moves are the right ones
The RBA has done what it needed to stabilise the financial system and the banks in particular, writes Terry McCrann.
Terry McCrann
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The Reserve Bank has taken one giant leap for sustaining the functionality of the financial system but only a small step for the actual economy and so for workers and business.
This is said with apologies to both the late astronaut, Neil Armstrong, whose quote I’ve borrowed, and reversed; and to RBA governor Philip Lowe, whose actions I am most definitely not, repeat not, criticising.
Indeed, I’m doing the exact opposite.
He’s done exactly what the RBA needed to do and what it could sensibly and effectively do.
Although this is not to deny it might still need to do more and a “more” which could take it, and the banks, and the federal government, and business, indeed Australia in total, into very new, strange and uncomfortable territory.
Simply, what the RBA has done is to stabilise the financial system overall and the banks and the specific financial institutions in particular; and to give an unlimited commitment to do whatever further it takes to maintain that.
It has also structured this support around an interest rate of 0.25 per cent — to all intents and purposes, that’s interest-free money.
This is the new official rate. It is the rate that applies to all government bonds out to three years. It is also, critically, the rate at which it will lend at least $90 billion — that’s where it will start, I think it will go much higher — to the banks, to on-lend to especially small and medium businesses.
All this is fundamentally necessary as the entire country confronts the greatest economic and financial crisis, certainly in the 75 years since the end of the Second World War if not in our entire history. But it’s not going to do anything directly for the 30,000 Qantas staff, many if not most of whom are going to lose their jobs — hopefully, only for a period of months — or the countless tens of thousands more in tens of thousands of nameless small businesses to the biggest across the country who are already following them.
In a sort of sick statistical joke, the ABS released its monthly jobs data showing a surge in jobs and a drop in the jobless rate back to 5.1 per cent — the sort of numbers that would have had the RBA happy to leave its rate at the 0.75 per cent that applied up until a couple of weeks ago.
I don’t think I’ve ever seen a statistic surface more instantly obsolete.
It described an Australia that has vanished and will take a long, long time to return.
It’s not simply that it is not the RBA’s job to try to fix or support all those losing their jobs because of the virus and even more the stages we have taken to fight it. Much more fundamentally the RBA just doesn’t have the tools to even attempt that.
Its job is to ensure a destabilised financial system and tottering banks do not make both the problem and the attempts to offset the problem both worse and more difficult. The sound financial system enables the banks to do their bit — and the CBA showed exactly how that could be done, to support both business and individual customers.
Before this is over, it will almost certainly have to do more.
The sound financial system also not only passes the buck to political government to embark on, but also underpins, the massive fiscal spending that will be needed to support jobs and to support people directly.
What’s needed is direct loans and indeed non-repayable taxpayer grants to businesses and individuals — like, say, the government picking up some or all of wages that businesses are up for; to start for, say, three months, but probably longer.
As opposed to letting businesses collapse and their workers thrown on the dole anyway.
The government must also move to take equity positions in businesses — just like the US and European governments did with their banks through the GFC.
We did not come close to having to do that in Australia back then — the RBA underwriting bank liquidity was enough. It could prove a different story this time.
Understand all this and you can understand why the RBA’s huge step to underwrite the financial system, and to do so aggressively and publicly and with no limit, was so critically important; but at the same time was tiny in the bigger scheme of things.
That’s now over to Scott Morrison and Josh Frydenberg. Their Stimulus 2.0 has to be completely different to Stimulus 1.0 and at least six times the size; indeed as necessarily unlimited as the RBA’s.
THE CBA STEPS UP — AND STEPS UP BIG TIME
The Commonwealth Bank stepped up big time. It stepped up immediately.
It stepped up on a very wide front.
It aimed the money where it was most needed.
Yet it still managed to over-deliver to its core owner-occupier borrower base. To borrow that famous phrase from the late Bob Hawke, anyone who attacks it for not cutting its basic variable rate is a bum.
I’d go further — is a pathetic, moronic ignorant bum. Any owner-occupier can switch to a fixed rate at the much lower 2.29 per cent — that’s far better than a 25-point rate cut. Thanks to the RBA’s 25 point line in the sand pretty much for the foreseeable future, that’s also viable for the CBA.
Just. The CBA will take a profit hit. But it’s also competitively smart.