Recessions and Interest rates

[moyjos]

I do remember the "Recession we had to have" and went through the 17.5% interest rates. But (to be perfectly honest) I was too young and too tied up with babies to actually learn what was going on

Can somebody please explain to me the difference between the last recession and why interest rates went UP and now why interest rates keep dowing DOWN

 

[MarkB]

...the last recession and why interest rates went UP and now why interest rates keep dowing DOWN

The Undertaker
[Paul Keating]

 

[MarkB]

That was the short answer.

This is the longer one:

Something I posted in 2003.

The "recession we had to have", interest rates pushing 19% and 10+% unemployment are all ALP legacies.

John Edwards (Chief Economist at HSBC) wrote Paul Keating's Biography (Edwards used to be Keating's economics adviser) - in it there are some fascinating insights into economic management during Keatings term as Treasurer (1983-1991).

Like this little gem. The book acknowledges (it actually names names) that certain people in Treasury and Keating himself were of the opinion that for interest rates to be falling in time for a particular federal election - they first had to rise (to about 17%).

This is completely reprehensible.

Interestingly, the book acknowledges that the RBA Governor of the time (Fraser) was happy with this arrangement (Fraser was appointed by Keating, first as Secretary to the Treasury, and then as Governor of the RBA).

But at least one senior RBA official - an Assistant Governor by the name of Ian McFarlane was not. He was of the opinion that rates should fall immediately.

In light of this (and a few other things I know about him) I would have to say that McFarlane is precisely the sort of person you want running the RBA.

His 7 year term ends in a couple of months and personally I believe he will be reappointed.

And rightly so.

McFarlane was re-appointed too, btw.

 

[evand]

Paul Keating decided to 'de spiv Australia' (his description) after the excesses of the 80s. So he jacked up rates, which caused a recession in the early 90s.

 

[MarkB]

Imo, they keep falling now because of two things:

1. the lessons learned from the last recession

2. No-one yet knows where the bottom of the economic cycle is and central banks worldwide are doing a herculian effort and rapidly cutting IRs (though I was of the view the RBA should have been cutting earlier than they did).

 

[Invest]

Are we safe to say the rates will stay down for the next 2-3 years? I mean I cant see US and the rest of the world includng Australia recovering from the financial crisis within at least 4 years time.

 

[MarkB]

Based on what we know, I personally (imo) don't see IRs rebounding anytime soon.

 

[BoatBoy]

Are we safe to say the rates will stay down for the next 2-3 years? I mean I cant see US and the rest of the world includng Australia recovering from the financial crisis within at least 4 years time.

Recovering as in back to where we were
or
Recovering as in stopped and turned the corner?

I suppose as you said recovering it reads as stopped and turning the corner in 4 years.

Dave

 

[weg]

why interest rates went UP and now why interest rates keep dowing DOWN

They went up and down in both cases. They were up too high and too long with Keating whereas I'd say this time they got the rate down pretty quick smart to prevent a recession like last time.

The 17% interest rate did basically the same job as the 8.75% rate of 2008.

 

[J Martin]

It was done in part to break the high levels of inflation of the 80s. Hence the (in)famous term "the recession we had to have".

It was quite an extreme action, but ultimately worked. Look at inflation heading into the early 90's. Whether it was the "right" thing to do is debatable. Amongst other things, it set Australia up for future prosperity into the 90's...

 

[MarkB]

Further to J Martin's post.

Keating's infamous "recession we had to have" comment also reflected the massive structural adjustment that was occuring in the economy arising from the micro-economic reforms of the 1980's and early 1990's (tariffs and subsidies cut, privatisation of GBE's, etc).

We became a leaner (less fat), more internationally competitive economy as a result and could subsequently pull off quite good growth figures whilst maintaining a very low CPI.

It also helped that in 1993 (I think) the way Monetary Policy is practised changed. The inflation target (2-3% over the medium term) came into force and the political influence on interest rates (notable example P Keating as per above) became more discrete and less audacious.

 

[TheAnalyst]

Keating's infamous "recession we had to have" comment

A loser's self defence. Just like RBA now, last year in July (or august), when they rose the last 0.25%. If they are supposed to be as managing the finance, they should have enough knowledge on the problems the financial market had. I read an article 1 week ago about how the biggest UK bank was brought down. The guy said as the state bank of uk which did not know their own problems, how would you expect all the external analysts could know better about this bank? He asked the readers not to blame their brokers or analysts for their poor recommendations.

 

[Invest]

A loser's self defence. Just like RBA now, last year in July (or august), when they rose the last 0.25%. If they are supposed to be as managing the finance, they should have enough knowledge on the problems the financial market had. I read an article 1 week ago about how the biggest UK bank was brought down. The guy said as the state bank of uk which did not know their own problems, how would you expect all the external analysts could know better about this bank? He asked the readers not to blame their brokers or analysts for their poor recommendations.

Agreed. I dont mean to sound harsh but if I had my way, all the "experts" at Reserve Bank of Australia would be on the dole for a very long time... see how well they would cope paying off their mortgages.

 

[Kennethkohsg]

Dear All,

1. With wisdom gained from hindsight, it took the RBA more than 2 years to increase the Interest Rate by an overall 2% in 2006-2008 and less than 4 months period to drastically drop it by 4% subsequently from September 2008 till February 2009 to the present 3.25% Official Cash Rate wef 4th February 2009.

2. Consequently, the RBA has clearly "mis-judged" the adverse impact of the recent global financial crisis on the Australian Economy, in the past.

3. "Ably-guided" by the Australian Treasury, Kevin Rudd, Wayne Swan and his ALP Federal Government were also barking at the wrong tree regarding the "run-a-way Inflationary Scenario" in March 2008 period previously, and having to subsequently reverse their Monetary Policies and to urgently implement the A$10.4 Billion Economic Stimulus Package in October 2008 period, at the last minute.

4. Then, there was the existing professional/policy differences between the Australian Treasury, as represented by Ken Henry and the RBA, as headed by Glenn Steven, on the other, regarding the recent controversy surrounding the Government' policy of provided "un-limited" Guarantee for Bank Deposits in Australia.

5. This conflicting policy views between the Australian Treasury and the RBA has further again, surfaced in this second A$42 Billion Economic Stimulus Package, proposed by the Kevin Rudd's ALP Federal Government, earlier this week.

6. Consequently, I am presently wondering who is truly and effectively managing/running the Australia Economy now, at this point in time?... Or is the Australia Economy actually been set to operate on its "auto-pilot" mode, through adjusting the various monetary or/and fiscal policies subsequently or is it actually being determined as a result of the dirty politicking outcome between the ruling ALP Federal Government and its opposition,namely the National-Liberal Coalition Party, please?

7. For your further comments and discussion, please.

8. Thank you.

regards,
Kenneth KOH

 

[MarkB]

Hi Kenneth

The economy is being run, as always, by the 21 million or so people who make it up. Collectively they decide our fate.

The Government and the RBA are there to give them a good shove in what they consider to be the right direction but, as the saying goes, just because you lead a horse to water doesn't mean it will drink.