Monetary policy and the third way

Thus if the Reserve Bank thought there was an asset bubble forming in the equity markets a change to the ratio of reserves required for margin loans would restrict capital for margin loans without impacting on the cost of money (interest rate) for other sectors. This would enable the Reserve to undertake a monetary policy response to a particular sector without taking a sledgehammer to the rest of the economy. It would also be a very powerful signal to investors and the markets about asset valuations within that sector and lead to reassessment of risk within that sector.

Reserve Banks are well placed to be able to judge asset bubbles, and by establishing clear and transparent policies to guide intervention by altering the holding ratios between the banks and the Reserve it will be able to send clear signals to the markets about risk.

For equity markets a range of measures could be used such as price/earning ratios, for residential property price/income ratios and vacancy rates etc could be used.

We have seen the potential damage by adopting a non-interventionist monetary policy. The consequences can be dire. We must abandon the delusions of the past 20 years that the invisible hand of the market enables socially desirable outcomes. We must recognise that markets can act irrationally overlooking or incorrectly pricing risk.

Social Democrats cannot affect a third way without a fundamental change to monetary policy. We cannot simply tack on health policies, education policy and other social policy to the fundamentally flawed Chicago School monetary policy and expect to deliver long term beneficial reform.

For too long debate on monetary policy has been abandoned to a failed and discredited ideology, now is the time for a rethink and fundamental reform. Social Democrats and proponents of the third way must not shirk our responsibilities in shaping and fermenting debate on monetary policy.