Australia has the world’s best central banker

The headline reads, RBA’s Stevens says it’s time for government to step up on growth and this is the point:

Stevens says central banks have done all they can to boost economic growth and, eight years after the global financial crisis, it is time for governments to do more.

And if you missed the message, here’s a bit more:

In a speech in New York last week, he said central bank intervention was effective at heading off a potential catastrophe after the Lehman collapse but always­ had limited ability to accelerate the recovery. Rate cuts bring only a short-term boost to activity. He said the fall in global interest rates, which has been under way since 2007, reflected more than the actions of central banks.

Nothing left for central banks to do. And here is a bit of financial artistry that sets out the central point:

Financial assets are just paper claims on the flow of real returns from business investments or, in the case of government bonds, on the ability to tax those real returns. “If the real economy can’t perform to provide real returns to capital, there is nothing to back higher yields on financial assets.” Stevens says the lack of profit in the real world is the cause of the global stagnation, and central banks are powerless to change that. The growth potential around the world has fallen, he says.

That is so exactly right and I don’t think you can hear it said anywhere else. We are in a fiscal mess which cannot be fixed by adjusting interest rates up or down, although pushing them up would at least do some good. And even when he shifts onto the fiscal side, he is precisely right but you have to pay attention to the words he uses.

Stevens acknowledged that years of slow growth were jeopardising the “social compact” in many parts of the world. He urged government­ to take advantage of record low interest rates to embark on infrastructure projects that would raise construction activity­ and lift productivity. The critical issue was good governance to ensure the right projects were built and managed to add value, he said, not lack of money.

Projects that add value are, unfortunately, almost never the projects chosen by governments since there is no profit and loss statement nor any serious means to ensure more value is created than is used up. But at least he understands what needs to be done, but has much more faith than I ever will in the decision making processes of government to get that kind of result

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