Michele Bullock didn’t cut rates on Tuesday. Bernie Fraser is sure she should have

Bernie Fraser is Australia’s most famous former governor of the Reserve Bank, a position he held spanning the prime ministerships of Bob Hawke, Paul Keating and John Howard. I spoke to him on Friday.

Fitz: Mr Fraser, let’s start with your own background in economics. With the greatest respect to your home town of Junee, which I love, it’s not necessarily the most obvious place for an iconic economics guru to come from?

Bernie Fraser has always had his eye on the money. Credit: Steven Siewert/Fairfax Media

BF: But I learnt so much about economics, right there. We were pretty underprivileged. I was the eldest of six kids, and my mother and father grew up during the Depression, followed by the war, and both missed out on any chance of an education. We had insufficient means but plenty of needs, so I came to understand economics and the basic choices and priorities of economics at a very early stage. And, I had all sorts of jobs: paper runs, getting rabbits for their skins and selling their carcasses, driving farmers’ tractors at night and working at the flour mill during vacations. So my real life experience in economics was pretty potent, actually.

Fitz: How did you get to the actual study of the discipline?

BF: Most kids quickly dropped out of Junee High – not even doing the Leaving – but my mother did some cleaning there and some of the teachers convinced her that I should stay on. Of the 50 or so in my year who did the Intermediate Certificate in third year, I was one of only five who went on to do the Leaving. I got a Teachers Scholarship to the University of New England, studying economics as part of my Arts degree. But instead of going on to teaching, I joined the public service and went from there – paying back my teacher’s scholarship as I went along.

Fitz: Well, you’ll be pleased to hear I’m something of an economics genius myself. But let’s just say, for argument’s sake, that in Mr James’ economics class back in 1977 I was one of those footballing clowns, reading Phantom comics up the back with my lips moving. If you had to explain in the simplest language possible to one of those dullards what the Reserve Bank does, how would you do it?

BF: [Laughs merrily]. Well, it’s very fortunate that in Australia we have a legislated charter that is written in very explicit terms, saying that: the Reserve Bank shall be responsible for determining interest rates and, in doing so, it should exercise the best judgment having regard to three considerations: [inflation], maintaining full employment and being sensitive to the wellbeing of present and future Australians.

Fitz: And it must do all of this, completely independently of the government and political considerations?

BF: Definitely.

Fitz: And so to what everybody wants to know right now. The US Federal Reserve just dropped interest rates by half a point. A lot of people thought our RBA would follow. Were you expecting them to do so immediately?

BF: I had hoped they would. Unemployment pressures have been increasing a little in recent times in the US, and that’s why their Federal Reserve acted and surprised people by going a full half point in reducing rates. Now, one of my concerns with the way the present Reserve Bank board is behaving is that in my view it’s over-focused on the inflation objective, and keeps talking tough about controlling inflation – and not moving interest rates down until inflation itself is clearly on the downward trend. It’s even said it might put interest rates up again. But in doing so it is not putting appropriate weight on the other factors: the growing slowing of our economy, and the implications of that for an increase in unemployment in Australia down the track. Inflation problems vary in origin for all sorts of reasons, and the Reserve Bank has gone as far as it can, in my view, of having effective pressure on inflation through interest rates.

Fitz: But is it inevitable that, before Christmas, or in the New Year, our interest rates here will fall like they have in the US?

BF: Well, I think they should be falling now and the RBA should have already dropped them, but that’s my judgment. All these high interest rates that we’ve had for so long are causing businesses to go bust. They’re causing a lot of small businesses to go out of business, and that’s going to increase unemployment. And with an eye to the future, they should be saying, well, we’ve got this obligation to maintain full employment or as good as we can, and they should be taking steps now against that prospect, rather than being rather blinded by inflation alone.

Former RBA boss Bernie Fraser and current RBA boss Michele Bullock. Credit: SMH

Fitz: But is a fall inevitable?

BF: Not inevitable. But it should fall. The economy is slowing. It’s looking a bit weaker. It’s looking a bit weaker globally as well. And they should be saying to themselves, “look, let’s start to do some preparation for the weakening of the Australian economy, and let’s start winding back interest rates now.” You know, it’s an art, not a science, but that is my judgment.

Fitz: Alright, when you were Reserve Bank governor, of course you had to be ruthlessly apolitical, and I don’t ask you to be political now, but now you can speak without fear or favour. And I’m interested in your view: how is this government going in terms of economic management? And how do you judge this treasurer?

BF: Well, I don’t know the present treasurer, but I note he’s been very careful not to raise questions about the independence of the central bank, and I think that’s great.

Fitz: Yes, but beyond what the treasurer does regarding the Reserve Bank and observing their independence, we the people are interested in your assessment of the treasurer’s skill or lack thereof in acting as a steward of the economy. Is he good?

BF: Yes. The circumstances that the present government found itself in when it came into power required much more than a blunt instrument of monetary policy to deal with the problems that they inherited, and I think they’ve exercised quite a lot of skill and wisdom in what they’ve done on the fiscal side of things.

Fitz: Again, for those poor bastards who weren’t concentrating in economics, please remind them of the difference between “monetary” and “fiscal” policies?

BF: “Monetary policy” is broadly setting things like interest rates, as the Reserve Bank does. “Fiscal policy” is things like raising and lowering taxes, and lowering or lifting spending which the government does. And I think the Albanese government has done well in things like revising that third stage of the personal income tax reductions, and the things that they’ve done to help aged care and other care activities, as well as provide support to bring down energy bills. That was what the current situation required, because things were pretty grim when they came into power because of the vulnerability of lots of groups from the higher inflation, and they’ve been pretty disciplined in dealing with that in their government spending.

Fitz: By delivering two budgets reducing the deficit?

BF: Yes. But I also think there are problems looming for the present government, with some time bombs of those commitments that they’ve made to justifiably help a lot of the care sector – disability care, aged care, childcare, all that kind of thing – as well as those hugely expensive commitments in the defence area. So unless they’re prepared to defuse that by also fronting up to some matching action on the taxation side to pay for those future commitments, they will indeed be time bombs. But just as Paul Keating was, to me, a very good and very effective treasurer and did a lot for this country, I think in his own way Jim Chalmers is trying to do the same kind of thing. We have to remember that both of them came to power in difficult times, and faced quite severe challenges. But Chalmers has displayed a very determined commitment to help vulnerable sections of the community, and that is something that gets top marks from me.

Paul Keating in a huddle with Bernie Fraser in 1989.Credit: David Bartho

Fitz: Was Chalmers unwise to say that interest rates are “smashing the economy”?

BF: I don’t think so, because while the Reserve Bank must remain completely independent and exercise its judgment, there is space for differences of view about the judgment that the bank has exercised, without threatening its independence. I don’t support their judgment right now because, as I said, I think they are putting too much weight on the inflation objective and not enough weight on the difficulties for all the vulnerable groups out there, and the prospect of more people becoming vulnerable and unemployed in the months ahead as the economy slows down.

Fitz: It sounds to me like your north star of what is or isn’t good economic policy is positioned over your family’s kitchen table back in the Fraser household in Junee many decades ago, and judging how it affects other families just like it now?

BF: Indeed it is.

Fitz: Alright, the issue du jour is whether the government should tweak or change the laws on negative gearing. Do you have a strong view?

BF: Yes. I feel that housing is there for people and families to grow up in, not to be a tax-funded incentive investment. I still feel that way. When I was in the Treasury under Keating, he felt the same way. He tried to remove some of the concessions on negative gearing, and I fully supported him in doing so, and encouraged him to do it. But the outcry was so great when he announced it, that he had to put those concessions back – which I regret.

Fitz: So do you think this government should claw back negative gearing now?

BF: They should, and I referred earlier on to the revenue problem that they face down the track that will oblige them to claw back on a lot of things, not just negative gearing, but the tax concessions, the capital gains tax concessions on housing and the various other concessions in so many different areas of the economy that they’re going to have to pull back on to get the revenue to fund their commitments to all the care activities, and defence equipment.

Fitz: On another subject, Donald Trump has proposed radical economic policy changes if re-elected, including imposing extremely heavy tariffs on imported goods, and himself taking control of … monetary policy too – thank you, thank you – by changing legislation so that he could personally lower interest rates. What would be the economic effect of such measures?

BF: [Laughing, dismissively.] Disaster. Trump has got no conception at all of economics or economic policy. He’ll impose tariffs on imports of every country he doesn’t like and the cost of their goods in America will go through the roof. And if he lowers interest rates at his whim, the value of the American dollar will fall. All of his crazy policies would be aimed at helping his cronies. The overall inflationary effect would be devastating.

Fitz: Finally, I note that the great football commentator Ray Warren is about your age, and is one of Junee’s other most famous sons, with Laurie Daley. You must have been at school with Ray?

BF: Yeah, we played a lot of tennis and cricket together and went to movies on Friday nights and all those kinds of things.

Fitz: What was he like? Did you talk a lot about football?

BF: No. I don’t think Ray was a great rugby league player. I was totally wrapped up in rugby league and played a lot, but not Ray.

Fitz: He must have been an economics wonk, then, I guess?

BF: No, I wouldn’t go that far either ...

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