A former Reserve Bank board member has accused Wayne Swan, the man once judged the world’s greatest treasurer, of economic vandalism.
Warwick McKibbin fired the broadside at Mr Swan, accusing the former treasurer of being reckless with the central bank’s reserve fund.
The new Treasurer, Joe Hockey, this week gave the bank an unprecedented $8.8 billion cash injection to replenish the fund, saying the ammunition was needed for the uncertain times ahead.
Until the global financial crisis the fund held $6 billion on average. After the GFC it was depleted to $1.3 billion before recovering to $2.5 billion.
Professor McKibbin said the rule of thumb was to have about 10 per cent of assets in the reserve fund, which traditionally would have been around $10 billion.
“From the last annual report, we see the reserve fund was driven down below $2 billion, so adding $8 billion gets back to where we need to be without crisis,” he said.
The last two treasurers – Mr Swan and Chris Bowen – say the RBA never asked them to boost the bank’s reserve fund.
Mr Swan says if the request had been made to him, it would have been granted.
But Professor McKibbin said this was a “bizarre statement”.
“Because when I was on the board 2011 – I finished July 2011 – we made a very large loss because of the very high Australian dollar,” he said.
“The following year after I’d left, there was a small profit of over $1 billion. The treasurer was requested not to extract that from the balance sheet of the bank.
“He ignored that request and took $500 million so that he could reach the budget surplus in 2012-13.
“That to me is economic vandalism. It wasn’t that he may not have been asked to put more money in, but he was certainly asked not to take money out.”
Swan was taking ‘very huge risk’
RBA governor Glenn Stevens appeared before an inquiry earlier this year. He confirmed he wrote to Mr Swan asking that all the bank’s profit be retained to replenish the fund.
“My preference was, and this was expressed, that I’d like to retain the whole 1,096 (million dollars) to build up the Reserve Bank reserve fund, but he did not agree with that,” Mr Stevens told the inquiry.
Professor McKibbin served on the RBA for 10 years and he was not a fan of the Rudd and Gillard governments.
He says the bank’s 2012 annual report made it clear the reserve fund was not healthy.
“If you look at the annual report, it’s very clear that the balance sheet of the Reserve Bank was exposed completely to this scenario,” he said.
“If the treasurer hadn’t read page 103 of the annual report, he either didn’t understand his job or he was taking a very huge risk with the Australian economy with a one-sided bet.
“That bet was that interest rates would go down and the Australian dollar would weaken.
“If he got that wrong, the Australian central bank would have had no capital.”
McKibbin not reappointed by Swan to RBA board
Mr Swan declined to respond to Professor McKibbin on camera.
He says he is not surprised by the criticism because he did not reappoint him to the RBA board when his term expired in 2011.
Mr Swan says Mr Hockey’s decision to bolster the bank, blow out the deficit, and raise the debt ceiling, are all aimed at demonising him and the former Labor government.
The board released its annual report on Thursday; shadow treasurer Chris Bowen says it makes no mention of the need for a cash injection.
“At no point did the Reserve Bank of Australia ask the previous government for a top-up over and above their profits.
“They didn’t ask Wayne Swan – they didn’t ask me.”
RBA deputy welcomes cash injection
The bank’s deputy governor, Philip Lowe, welcomed the injection – in considered language.
“I think the current Government’s decided to move quickly to the desired level of capital to make sure that the bank’s balance sheet is of unquestionable quality, and I think I see that really is in our collective interest,” he said.
While the Government and Opposition squabble over the fund, Professor Ian Harper from Deloitte Access Economics says the unprecedented injection positions the bank for uncertain times.
“One of the great concerns that many of us who watch the Australian economy have is that the exchange rate is continuing to appreciate with the mining investment boom having come off,” he said.
“We were hoping of course that the exchange rate would depreciate and what that would do is stimulate other export activity to take the place of the mining investment boom.
“What we don’t need is the exchange to be going the other way.”