Professor Peter Swan

The bribery scandal and apparent cover-up revealed in yesterday’s ABC’s 7:30 Report and The Age that is now engulfing the Governor of the Reserve Bank of Australia (RBA), Glenn Stevens, his former deputy, Rick Battellino, now retired, and the RBA Board had its origins in one of Australia’s great technology success stories. This was the invention of plastic (polymer) bank notes in the 1980s. Having successfully protected its property rights despite fears of reverse engineering by overseas note printing interests, the RBA and two offshoots, Note Printing Australia (NPA) and Securency International, involved in polymer note printing and marketing, have been accused of covering up the scandal that involved payment of large bribes (secret commissions) to politicians and officials in a number of Asian countries.

When senior RBA officials were given a detailed memo providing details of the bribery scandal as early as 2007, the matter was not taken to the Australian Federal Police and there seems to have been no public acknowledgement of the problem until press reports raised the issue about two years later.

Although this is the second major bribery scandal involving exports to foreign governments, the kick-backs on the sale of wheat to Saddam Hussein of Iraq by the Australian Wheat Board being the first, this appears to be the first that has sparked a major police investigation and large-scale prosecution of officials involved. Corrupt payment of bribes is illegal in Australia, even to foreign officials and politicians, even though it is an accepted part of doing business in many parts of the world. In fact, many would regard it as a necessary cost of doing business and way to promote Australia’s exports.

As is usually the case, the bribery and corruption pales into insignificance relative to punishment metered out to those who cover-up. Richard Nixon was forced to resign, not for hiring the ‘plumbers’ in the first place but rather for his failed cover-up attempt.

The involvement of the most senior officials of the RBA and possibly the Board in the cover-up, even if they were unaware of large-scale bribery prior to 2007 in the bank-note offshoots, is an exceedingly damaging development for an organisation that until recently has retained a reputation for integrity and exceptionally good monetary policy in recent years.

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There is an ongoing investigation into the Bank of England’s oversight of the rigging of the LIBOR interbank rate by Barclays and other British banks at a time when the Bank of England was facing the prospect of further massive public bailouts of the banks. Mr Bob Diamond, Barclay’s CEO who was forced to resign because of the scandal, explained to a senior Bank of England official at the time that “not all banks were providing [LIBOR] quotes at the level that represented real transactions.”

By this he meant that a number of banks including Barclays were deliberately understating their borrowing costs to make it appear they were more solvent than they really were. Lack of response from Bank of England officials, who claim not to have interpreted the conversation in this light, was taken by Barclays as implicit acknowledgement and support by the Bank of England for LIBOR rigging.

In the case of the US Federal Reserve, lax monetary policy and their success in bringing the cash rate down to close to 1% after the bursting of the internet bubble and 9/11 has been blamed for exacerbating the credit crisis that led to the GFC. Certainly, FED oversight over the lead-up to the GFC and the US NINJA loans scandal was weak. It has only recently been revealed that RBA and other Australian regulators were almost equally lax in allowing Australian banks and mortgage providers to push huge numbers of ‘low-doc’ loans on impecunious investors who had little or no prospect of repaying. Banks and mortgage providers seem to have secretly filled out forms to make it appear that borrowers were in a far more financially sound position than they were in reality.

The plastic banknote bribery scandal and cover-up places the largely very distinguished business people making up the RBA Board in an exceedingly difficult position. Did they know of, or should they have known what was going on at the time of the presumably secret 2007 Memo or even earlier?

In the CENTRO case, the court found that non-executive directors cannot uncritically accept advice from either management or auditors. Directors must take ultimate responsibility for company affairs. Of course, unlike CENTRO, the RBA is not a listed company with shareholders. It is the Federal Treasurer and Government that appoints directors to the RBA Board and thus should play an important role in its oversight. The Treasurer also appoints the Governor of the RBA. I should imagine that the Governor is accountable to the Treasurer, the Government, and perhaps ultimately to Parliament.

It is tragic that the scandal and apparent cover-up has damaged the reputation of the Governor, senior officials, board members and the RBA as a whole, despite the high regard for its conduct of monetary policy. The best we can hope for now is a quick end to the cover-up, if there really was one, and a speedy resolution of this very sordid affair. The successful setting of monetary policy is very much dependent on the reputation of the RBA. This needs to be repaired as quickly as possible.

Professor Peter Swan is the Professor of Finance at the Australian School of Business. This article first appeared in the Australian Financial Review.

Peter Swan

Now that the Reserve Bank has cut interest rates, the question is – which one of the big four banks will be first to cut, and by how much – if at all?

However may I suggest this may be the wrong question. Instead the RBA may be looking at giving a boost to industry from the cut in interest rates, with any benefit to homeowners just an additional perk.

The 25 basis-point cut to the official cash rate will lower the Australian dollar and take some pressure off the entire export and import competing sectors of the economy, including areas such as education that remain weak. It may take some time to work, but this will be a noticeable effect.

None of the four major banks have moved their standard variable lending rates in response to the RBA’s quarter percentage cut from 4.5 per cent to 4.25 per cent yesterday. Now there is speculation that they are engaged in a game of chicken, each waiting on the other to move first. But I think Australian banks risk the political wrath of not passing on yesterday’s cuts in full as the banks seek to protect their profitability amid rising funding costs.

So far only two relatively minor lenders have passed on the cuts, and they are lenders that finance much of their mortgage lending from savings, rather than borrowing on the wholesale markets.

All banks have warned that, even though most are fully funded for the short term, the European sovereign debt crisis has pushed up wholesale funding costs. The banks’ profit margins are also under pressure given the flat lining credit demand in Australia.

There is a great deal of international uncertainty caused by the meltdown of the Euro and the slashing of the ratings of Euro countries including Germany and France. At the same time, the non-mining sector of the Australian economy remains weak. Indeed, reading their announcement it is clear that the Reserve Bank could be forced to cut interest rates again if the outlook for Europe and the global economy keeps on getting worse. If that happens, the major banks would almost inevitably be forced to pass on the cuts rather than hold back, or they would risk a populist backlash that would anger the government.

Peter Swan is a Professor of Finance at the Australian School of Business.

Jonathan Reeves

As it tries to find a way out of its debt ceiling crisis and the economic doldrums, a consequence of US policy is that inflation is being exported to the world, and that includes Australia.

Unlike the European Union, or indeed any other enterprise in the world, the US Federal Reserve has the unique ability to print more US dollars if it – and the US Treasury – deems that this is in the US economic interest.

We have had QE1, we have had QE2, and as a result of the debt ceiling compromise we may well also have QE3. The US debt deal includes major fiscal cut-backs, increasing the likelihood that the US will continue to rely on heavy monetary stimulus in its post GFC recovery phase.

It is a policy which is keeping the value of the greenback down and contributing to the record high values for the Australian dollar, a factor which is not necessarily good for our economy. Just ask the Australian education, tourism and manufacturing sectors how they are faring right now.

Inflation is a global issue and the Americans are only one, albeit large, factor in fuelling its momentum. Energy costs are rising, as is the cost of food around the world.

The reality is that US policy has intentionally devalued the $US through the mass printing of money, putting substantial pressure on the AUD$ exchange rate and the Reserve Bank’s inflation and interest rate policy.

Currently, the RBA has an inflation target of between 2 and 3 percent. Referring to this target has been a major reason why the RBA’s official cash rate have progressively risen to 4.75 percent. With a widening interest rate differential it is no surprise that the $AUD has climbed so high against the greenback, as speculators pile into a currency which – like the Brazilian real – is one of the hottest in the world right now.

All this calls into question the wisdom of the RBA’s target inflation numbers. The 2 to 3 percent per annum target is far too low in the current economic climate, and adhering to it can only exacerbate the developing exchange rate, interest rate and export issues we are currently experiencing.

Instead, the RBA should raise its inflation target to 4 percent, a move which would help us avoid some of the economic problems we have seen internationally. Raising the target would certainly take some of the pressure off the RBA to raise interest rates, and it would also take some momentum out of the $AUD’s strength.

Mining magnates may be sitting on unprecedented wealth, but a look at the rest of the economy shows that personal debt levels are at record levels – comparable to struggling economies such as Ireland. Raising rates to fight inflation would create significant financial distress and prompt sharp falls in property values, further dampening already fragile consumer and business sentiment.

Inflation at 4 percent would assist in reducing debt levels, as it did in World War II following the Great Depression.

It seems that the RBA may be mindful of this, despite maintaining its current inflation targets. Earlier this month RBA Governor Glenn Stevens said the board believed “it was prudent to maintain the current setting of monetary policy” in view of the “acute sense of uncertainty in global financial markets over recent weeks.”

The RBA has not raised rates since November 2010, and inflation has been creeping upwards and currently sits at 3.6 percent. Officially amending the inflation target would take the wind out of ongoing expectations of a rate rise and could prompt some easing in the value of the $AUD.

At 3.6 percent, Australian inflation is not high by current international comparisons and does not pose as much of a threat to our economy as record highs for the currency. Given two “evils” – inflation or an appreciating currency – it is clear that our current level of inflation is by far the lesser evil of the two.

In fact, tolerating a higher level of inflation could be the key to helping Australia navigate the turbulence of the global economy.

Dr Jonathan Reeves is a financial economist at the Australian School of Business at the University of New South Wales.

A version of this opinion piece appeared in the Australian Financial Review on the 9 August 2011.