RBA grapples with 'dilemmas, ordinary Australians suffer'

The RBA needs help. Australian monetary policy alone cannot solve the problems posed by global asset inflation.

As our better economists have said, one approach to an overvalued exchange rate is to introduce new economic policy reforms to help companies to cope with a high dollar that is greatly hindering efforts to export and to compete with imports.

Here is the rub. No practical and feasable program of economic reform could do more than raise Australia's productivity by a few percent each year. The Abbott government has at least stopped the productivity reducing policies of the late, unlamented Labor govenment but will hasten methodically with its reform program. Labor is committed to doing its best to prevent the axing of the carbon tax and would certainly scream with rage if the Abbott government tried to improve the working of the labor market or attacked fiscal spending sufficiently to create the real hardship in Canberra.

It is a sad fact that it is only an actual economic crisis, or plausible fear of a real crisis, that gets big reforms done quickly. Crises also focus business leaders and ordinary workers on the main game of improving productivity, but this is almost always accompanied by a powerful and damaging increase in unemployment.

This is why I believe we need to fix the currency problem by imposing a modest across-the-board tax on capital inflow. The skeptics point out that Australia is a capital importing nation and cowardly skeptics imagine that global investors would cross Australia off their investment lists if we imposed such a tax. 'Rubbish' is the correct answer to such arguments.

Taxing capital inflow will help to discourage the buying of expensive houses by wealthy people from overseas and rich Australians who play asset booms bravely and well. But, in the next decade or so, house price inflation will only be controlled if there is sensible reform by state and local governments, reforms that allow more people to live in the inner city areas, with higher density housing, faster releases of land for suburban housing and junking of near-useless regulatory blockages by local governments. Governments also need to find ways to encourage people to live and work in rural towns and cities. Like economic reform in general, this process will be at best slow and will not be sufficient to solve the problem of house price inflation. The people who oversee Australia's financial system need to introduce some new policies under the heading of 'macroprudential policy'.

Required asset ratios for financial institutions are part of the solution, ratios that flex up when asset booms gather strength and flex down when the booms decline or when overheated bubbles burst.

When the RBA meets in that large, quiet, board room that seems such a suitable place for quite contemplation or even religious observation (if only a pipe organ with a competent organist were installed), one sincerely hopes that the governor leads his board members in prayer for the wisdom to face their problems (which are the problems of ordinary Australians) honestly and with clarity of vision.

The RBA cannot do more to achieve general reform than to advise quietly and speak generally and not often on the subject.

But the RBA can advise government and should do so in the strongest terms about the urgent need to reform the state of Australia's asset markets by giving it the tools it needs to keep the economy on an even keel while methodical general reforms are planned and carried out.