Transcript of Question & Answer Session Observations on the Financial System

Jacob Greber from the Financial Review. Thanks just a quick question before the inevitable one about monetary policy which I'm contractually obliged to ask you. The issue you mentioned about the impact on retirees today with this extremely low-yield world, what do you see as the role for monetary policy in that sort of a world, given that the impact of say cutting rates now hurts people in those positions far more than perhaps it benefits people who are borrowing?

Well it's a consideration and I've talked about those issues in other places at other times. But in a global setting you know this is a much bigger issue than just Australia and the fact is that for a whole host of reasons, one of which would be central bank actions but another would be the behaviour of investors themselves, these long yields are incredibly low. Not just the lowest in living memory but in all likelihood the lowest ever in human history, so far as we can tell. And I think to me this is – this is a learning issue for the longer run. I think insurance companies, pension funds, must find this a very difficult environment in which to meet the obligations that they have.

Ultimately what will be important is the real capital of economies, how productive and what are the earnings on that? And at present I would say that those earnings are probably pretty reasonable right now notwithstanding the reluctance of corporations to invest in many places in the world including here. So the hope would be that the real productive capital stock of the economy can still generate adequate earnings and ultimately that the financial rates of return we see will one day again bear a more normal relationship to that real set of capital earnings. But it will be quite an adjustment to get back to that world and it seems to be quite slow in coming and in the interim we have this – this phenomenon where in the financial space [an] increasing amount of risk is being taken and it's important people realise how much risk is being taken there, and they're appraised of it. Meanwhile real economy risk-taking, so called, is, you know, a little bit on the subdued side, so that's something of a conundrum that we hope might eventually be resolved, but I think that will take time.

Any other questions?

Do you want to ask your contractually obliged one and I'll just give you no comment now? How's that, we'll save you the trouble.

Let me tempt you anyway. The iron ore price is back up again, the dollar is firming and those unemployment numbers looked quite healthy. Is there a shift in your thinking happening there at all?

You'll find out in due course.

Nice try Jacob. Are there any further questions? We have this one from a gentleman just on the aisle here.

David Cox from Challenger Limited. Governor Stevens you said that one of the objectives of a better regime for resolution of a systemic bank's failure is to avoid tax payers' dollars being unduly involved. The Murray Inquiry has suggested that there be no ex-ante fee on the Financial Claims Scheme but it's also noted that the cap for the Financial Claims Scheme is relatively high by international standards, I think only the US has a similar one. Do you think that an alternative – would you like to comment on whether an alternative regime might be an ex-ante fee and a lower cap?

Well it's no secret that I personally have tended to be in favour of the ex-ante fee for the simple reason that I think there's a logic for the government charging for insurance that it's clearly providing. The Inquiry didn't agree with that, they came to the view that ex-post funding if funding's needed for the FCS is perfectly adequate and I accept that conclusion that they've drawn. As for the size of the cap it's at the generous end, that is true, I think it's probably not realistic to think that we're going to get it down; I mean it was a million dollars at one point and before that it was unlimited. So we've managed to contain that back to something that's at least in the international ball park. It strikes me as unlikely that we're going to credibly be able to lower that. But I think the big issues about resolution transcend the size of the deposit guarantee, they're much more difficult issues surrounding how you allocate losses in the event that a large entity of systemic importance gets into sufficient trouble that it's in doubt and I think having a deposit insurance arrangement is a helpful stabilising device in that setting but the questions are much bigger than just the deposit insurance.

There's time for one more question. Jennifer Hewett I think or is that Sally? Jennifer Hewett from the Financial Review.

Hi you talked – said that you didn't want to talk about monetary policy understandably but you did say that you thought there was too much weight put on monetary policy to get sustainable increases in growth. What else should the government and business be doing to get that in – to get that growth going and why do you think businesses globally remain so reluctant to invest and can you see that ending any time soon?

Well the comment that too much weight's been put on monetary policy was a global one. I think that's just obvious that central banks around the world in many jurisdictions have found themselves in the position of almost the only actor able to act because political processes were gridlocked or fiscal positions were already sufficiently parlous that people didn't think that there was room for fiscal expansion. Supply-side reforms are always good but they're very difficult to do politically, as we know, and so central banks have found themselves in this position of feeling I think what they can do is only of limited benefit but they have to try to do what they can and so they have. And the calculation they have to do is, is doing what you can helpful without running too many other risks associated with some of the measures you might take? That's a calculation that we always have to carry out.

What more could governments do? Well I think to the extent that what people are most uncertain about in our own country or elsewhere is what's their future income? What are their future income prospects? The more any government could do to make those prospects look more positive and increase confidence in those prospects the better. And if they could do that, that actually would give easy money more traction than it's presently getting. Now how can governments do that?

That's the big question and this does I think bring us back to productivity. It's kind of a – you know it's a boring lament in a way but future income, that comes from productivity and efficiency. And we know that competitive markets, support for innovation, genuine entrepreneurialism, all those things are the things that do most for our future income prospects for any given terms of trade story that we might have. So I think the focus comes back there, those are hard things to do. But really that's I think where the discussion needs to be and if you can create a positive narrative there and people do feel more confident about future income then we'll find that they're more inclined to spend today and that's – and that would be done in a sustainable way, so that's I guess what I'd say about those matters.