Central banks should 'lean' on bubbles: Stevens
CENTRAL banks should be prepared to take the heat out of debt-fuelled asset price bubbles, rather than relying on lower interest rates to "clean up" the mess after a bust, Reserve Bank governor Glenn Stevens has said.
12 Dec 2012 THE AGE - CLANCY YEATES
Over the past two decades, economists have debated the merits of central banks "pricking" asset price bubbles by raising interest rates.
While some argued central banks should "lean" on debt-fuelled bubbles, others countered that doing so was economically risky, and lower interest rates could always be used to revive future growth if needed.
Amid concerns a new bubble could be forming on global share markets, newly released comments from Mr Stevens suggest he is firmly on the side of "leaning". In closed-door remarks from August that were not publicly released until Tuesday, Mr Stevens said the debate had moved on "some way towards doing a bit more leaning".
"I would have thought that by this point we have to conclude that simply expecting to clean up after the credit boom is not sufficient any more," Mr Stevens said. "The mess might be so large that monetary policy ends up not being able to do the job when the time comes."
Property assets were especially significant because they tended to be leveraged, meaning booms and busts were felt across the financial system and economy, he said.
The comments come amid growing concerns the ultra-low interest rates overseas could be sowing the seeds of the next global asset bubble.
The influential Bank for International Settlements this week observed global sharemarkets had performed strongly in the past three months despite cuts to growth forecasts and profit downgrades - an "unusual" trend it credited to central banks pumping billions more into financial markets.
Few believe Australia's housing market is at risk of forming a bubble, but Mr Stevens said holding interest rates at very low levels in order to revive an economy "might leave its own toxic consequences".
Mr Stevens made the comments in a global context, rather than focusing on Australia, at an August conference that was jointly organised by the Reserve Bank and the Bank for International Settlements.
The RBA does not have an official policy of targeting asset prices, but some analysts believe the series of six rate rises in late 2009 and early 2010 were influenced by a surge in property prices.
On the opposing side of the so-called "lean versus clean" debate was the former US Federal Reserve chairman Alan Greenspan. Since the global financial crisis, he has been criticised for keeping US interest rates low during a housing boom.
Mr Stevens also stressed that interest rates could not do all the work on asset price bubbles - it was also incumbent on governments to supervise banks and collect accurate information on house prices.