Stealth mission looks to nationalise the financial system

Reserve Bank of Australia Governor Philip Lowe. Picture: AAP

The shock and awe following the Reserve Bank’s latest battery of monetary salvos — zero interest rates, a new $100bn slab of quantitative easing — obscured the bigger picture: a quasi-nationalisation of the financial system.

That sounds dramatic but consider what has been happening: more and more of the key interest rates in the economy are being fixed by government or, more particular, the government’s bank, the Reserve Bank.

The RBA on Tuesday promised the government would be able to borrow for three years at 0.1 per cent, down from the 0.25 per cent it had undertaken to ensure in March when the pandemic struck.

Reserve Bank governor Philip Lowe also said the RBA would buy $100bn of commonwealth and state government bonds, of terms of between five and 10 years, over the next six months to gain control of those interest rates, too.

“Is the RBA now financing the government? The answer is a simple no,” Dr Lowe said on Tuesday, batting away concerns about the central bank’s new $100bn bond-buying program.

The more complex answer is yes: the government owns the Reserve Bank, so the government is paying itself interest when its central bank holds its bonds.

Anyway, back to the banking system.

The RBA board also decided to reduce to 0.1 per cent the interest rate that banks pay to access a special line of credit set up earlier this year, which was recently doubled to $200bn.

To further encourage banks to buy assets, it slashed the interest rate Martin Place pays on its $68bn of deposits with the RBA — you can’t deposit with the RBA but banks can — from 0.25 per cent to zero.

Does that sound like a private financial system to you?

Slowly but surely, the bank’s (government’s) tentacles are working their way through the financial system.

The governor talked about the need to support “the proper functioning of markets”, but whatever market it is, it’s not a private one.

The nation’s bond traders will need to be fresh on Monday, Wednesday and Thursday mornings, when the Reserve Bank has flagged it would be buying different sorts of bonds in the “market”.

And don’t forget all those intermittent noises about “digital currencies”, which, were they to emerge, would make it impossible for households and businesses to turn their deposits into physical cash if their banks tried to impose negative interest rates.

To be fair, it’s not as if the RBA had much choice — it’s the same trend in all developed nations that have become addicted to artificially cheap credit.

All Tuesday’s measures were couched in terms of lifting inflation to meet the 2 to 3 per cent target, even though no central bank anywhere has met their targets for a decade.

But without a new theory to explain what’s happening, everyone has to pay lip service to the current one, even if few believe it.

It’s back to basics for central banks: manipulating the financial system in favour of their owner — and all creditors to the extent they are successful in boosting inflation.