“Central banks certainly did not ignore issues of financial stability in the decades before the recent crisis, but financial stability policy was often viewed as the junior partner to monetary policy,” he [Fed Chairman Ben Bernanke] said. “One of the most important legacies of the crisis will be the restoration of financial stability policy to co-equal status with monetary policy.”
via Bernanke Hangs Tough on Financial Reform.
The problem with having two equal objectives is, when they conflict, which do you choose?
Ms Luci Ellis, RBA Head of the Financial Stability Department:
Indeed, credit booms are very often part of the story in the lead-up to a period of financial instability. We published that assessment in the March and September Reviews. In the wake of that, we have sometimes been asked: how fast is too fast? Do we have a target for credit growth? Or for the ratio of credit to GDP? Or, perhaps, for housing and other asset prices? I can tell you quite plainly that we do not have numerical targets for any of these things. A target for credit growth, or any of these other variables, is not analogous to the RBA’s inflation target……….The distinction is simply that price stability is about inflation. So it can be defined as keeping inflation at an acceptably low rate. Financial stability is harder to define, but in essence it is about avoiding episodes when the financial system significantly harms the real economy.
My interpretation of this series of statements is that a fundamental flaw is at the heart of the RBA’s view of financial stability management. The RBA has specific targets for inflation and that is the single price (including assets) stability tool but has no targets or model parameters to govern financial stability. A big mistake not just of policy but market knowledge
via The Platypus blues – macrobusiness.com.au | macrobusiness.com.au.
Alarm bells should ring if household debt starts growing at 8pc to 10pc a year.