Is the RBA even relevant?

Date: Dec 5, 2018: Well…..yes of course it’s relevant. What else would Lowie have to do if it wasn’t for those long lunches chillin with his bro’s Hartzer and Co?
The thing is just how effective is the Reserve Bank of Oz in controlling monetary policy these days and is that a dangerous thing? Well lets pull back the curtain and have a squiz at the wizardry of it all.

Banks have cash on deposit that people put there to earn interest then they lend that cash out to people who are prepared to pay a premium for it. Typically there are more people who need money than there are people who have money so the Reserve Bank (the big bank) lends money (at their cash rate) to the other banks to meet demand and as a result the Reserve Bank can exert a level of control over interest rates charged by banks to consumers in general.

But……..
As a country we are now pretty crap at saving! For anyone over 50 – our parents weren’t too bad at stashing the cash away. Our parents parent’s were even better and we’re even half reasonable ourselves but our kids?……… I think they’ve been overexposed to the media driven, oversimplified, financial “Get Rich through gofundme with Someone Else’s Money While Only Working 3 Hours a Day” stories that seem to be so abundant on social media now that, like reality TV, reality has been distorted.

Why is this important? Well traditionally many, many eon’s ago a percentage of our population went into a bank and deposited money into their savings account. Yes I kid you not, that used to happen!
“Thank you” say’s the local bank manager who was reminded by Granny with a wobbly yet stern index finger that it’s his turn to bring a plate to the next BBQ, and once a month the friendly bank manager paid Granny reasonable interest. An amount she could actually live on and without paying any fee’s. Just on that……I’ve never quite been able to reconcile the concept of paying someone to give them money. Anyway… back to Gran, how does this happen? I hear you ask. Well after Gran leaves the bank o’l mate comes by and ask’s the friendly bank manager for a loan.
“of course” he say’s and lends o’l mate a few of Gran’s dollars at an interest rate that not only covers her monthly interest payment but also makes a tidy profit for the friendly bank manager for his trouble. Quid pro quo!

How is this any different today than it was back then? Our generation and the new ones coming through are far more obsessed with “living in the moment” which to me tends to translate to the excessive consumerism of the “I want it all and I want it now” strain that we simply don’t really build bank deposits anymore. A lack of cash to lend out to the long line of borrowers queuing at the now un-friendly bank manager’s door means that he now has to head overseas, not in search of someone cooking awesome Texan BBQ Ribs because no-one invites him over anymore but to source some much needed moolah in order to meet demand back home.

What this amounts to (and I do apologise for an over simplification of the problem) is that these days our cashflow as a country is more reliant on overseas funding than ever before. In short, our banks will go to wherever they can to get the best deal so they can remain competitive and in doing so, their objectives don’t always align with our own Reserve Bank’s idea of monetary policy. Lowie and the RBA did wield a big stick with which to occasionally whack an out of line banker and/or control monetary policy back in the day but just how effective is that stick now and are traditional methods failing?

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