It is difficult to say what is more foolish: the behaviour of Australian Treasurer Peter Costello or the behaviour of the US financial markets. Mr Costello was is in Washington for an International Monetary Fund and World Bank meeting and had a private meeting with the head of the US Federal Reserve Board, Alan Greenspan. Afterwards he very foolishly gave an on the record interview with Australian journalists. This was given in the context of financial market tea-leaf watchers predicting that interest rates would rise and that Mr Greenspan, like most central-bank chiefs, does not make public comments about interest rates.
Mr Costello told the journalists, “”He [Mr Greenspan] indicated to me that he saw no threats to inflation down the track and this of course was our own view too. I don’t think there is any expectation at . . . the moment that rates are going to rise.”
This was reported in the Australian Financial Review and picked up by the US media. The markets then moved accordingly. Prices of bonds and shares moved in the direction you would expect if an expected interest rate rise were cancelled … long-term bond rates fells and share prices rose.
Mr Costello said the Financial Review report was fanciful. He said further that his comments were not saying that Mr Greenspan had ruled out interest rates. Rather they were his personal observations about the US and Australian economies and the likely interest rate environment. Moreover, markets do erratic things all the time. None of the defences is very satisfactory. A tape proved the accuracy of the Financial Review report. His other defence is defeated by the prefacing words to the interest rates comment: “”He indicated to me . . . ”. It is true that markets are erratic, but on this occasion both the bond and share market changed precisely in the way one would have expected if Mr Greenspan himself had used a loud hailer from the Fed’s balcony. The causation is evident.
Mr Costello was very foolish. Since financial deregulation around the world, currencies have generally floated. Gone is the question of a currency revaluation being the one thing that Treasurers must protect with their lives. In its place, though, monetary policy has assumed huge importance and the question of official interest rates is of equal importance. Mr Costello failed to appreciate that. It is in the words of shadow treasurer Gareth Evans an appalling indiscretion.
It is probable that the gaffe will reflect on all Australian ministers travelling overseas, at least for a time. The flow of information will not be as free, to the detriment of the national interest.
It is difficult to fathom Mr Costello’s motives. Was he big-noting himself in the big smoke? Was he using the Greenspan intelligence to argue that now Australia has a Liberal Government things are going along swimmingly on the economic front? Or was he having a friendly chat with some journalists and did not realise the consequences of what he said? There does not seem to be a satisfactory explanation. Though an appalling gaffe, it is probably not a hanging offence; there was no deception or dishonesty. However, that does not mean the event should be forgotten. It becomes a mark in the performance-appraisal book which will make any subsequent gaffes that much more serious.
Interestingly, Mr Costello’s gaffe highlights the capriciously erratic nature of markets. They do not value bonds and shares according to the value of the assets behind them or the steady income they might generate, but according to speculative sentiment and capital gains. Perhaps the whole incident might temper Mr Costello and his government’s passion for the market.