•    HOME   
•    NEWS   
•    BUSINESS   
•    INTERNATIONAL   
•    TECH   
•    SPORTS   
•    LIFE & TIMES   
•    OPINION   
•    MY JAKARTA   
•    BLOGS   
•    EYEWITNESS   

Sydney. Central banks have a crucial role to keep a rein on the overall economy, a top Australian central banker said on Thursday.

“It will never be possible to eliminate the business cycle completely. But the quickest way to create a damaging credit boom is to run your economy too hot,” Luci Ellis, head of financial stability at the Reserve Bank of Australia, said at a conference on capital markets.

Avoiding damaging financial episodes also required regulators with the power, the mandate, the resources and the culture to respond to a threat.

“Even more important, they must be able and willing to intervene early,” said Ellis. “Not every regulator in the world would do so.” For the RBA, this included early communication of its concerns — warning about something that was not a problem now but had the potential to become one.

“Those exercises in communication are designed to mould risk perceptions.

“We are frequently trying to strike a balance between sounding too alarmist and sounding too complacent.” Ellis said there was no simple method for assessing threats to financial stability and neither did the RBA have set targets for things like credit growth or asset prices.

“There is no single indicator or smoking gun that tells you that financial stability is at risk,” said Ellis. “In the end, there is no substitute for careful analysis from a range of perspectives, focused on distributions and risks.”

This included keeping a careful watch on the attitudes and behavior of key actors in the financial system.

“The behaviors we watch for most carefully are the seeking of rents and the taking of risk,” said Ellis.

She defined rent-seeking as manipulating the economic and social environment to benefit yourself without adding any real economic value to the world.

On risk, the RBA tried to judge if those involved were correctly perceiving the risks they were taking as well as who was taking risk on behalf of whom.

The US housing bubble was littered with examples of rent seeking and inappropriate risk taking.

One example was the widespread practice of US home builders donating to charities which then gave the money to home buyers to make their deposits. Often the builder got the money back by inflating the sale price of the house. Borrowers who had received this kind of assistance were three times more likely to default on their mortgage than those who had not.

Ellis said that when she first heard of this practice she was incredulous, a reaction she likened to European scientists first seeing a stuffed Australian platypus, an animal so strange that they thought it had to be fake.

“It is not just a reaction to a statement or claim you find unbelievable. The reaction is to a practice or behavior you concede is truly occurring, but find bizarre or foolish,” said Ellis. “And it is that moment, that feeling, we should be alert to.”

Reuters