Keating & Fraser: Star-crossed Mates

The Age

Saturday August 2, 2008

Michelle Grattan Political Editor Canberra

PAUL Keating has accused the Reserve Bank governor of the time, Bernie Fraser, of doing him in by an excessive interest rate policy in 1994.

And, in revelations about the fraught relationship between the two, Keating has claimed Fraser failed to ease monetary policy in 1989 because of opposition from a board member who "looked like a bad priest".

Keating is quoted in a new book saying that in 1994 he had told Fraser his tough monetary policy "will be a killing cost to me". But Fraser was worried about an inflationary psychology returning.

"His attitude made it clear that the only way I could have been able to stop what was happening was to direct the bank", which would have ended its standing as an independent institution.

"Despite what I sensed then, that his policy change was going to do me in, I wasn't prepared to do that: I'd spent a decade trying to build the bank ... I couldn't pull the carpet straight from under them."

David Love, who was an economic consultant for many years, recounts the tensions between the "star-crossed mates" in Unfinished Business: Paul Keating's Interrupted Revolution. Keating launches the book in Sydney next week.

In 1990 Keating, then treasurer, boasted he had the "Reserve Bank in my pocket" but his historical flashback, in interviews with Love in 1996, tells a very different story.

Fraser, son of a bush worker from Junee, NSW, succeeded John Stone as Treasury head in 1984. Love writes that Keating felt "particularly warm and comfortable about this: for the first time, a Labor-oriented coterie of mates led by Bernie at Treasury surrounded the Labor treasurer".

Later, Fraser moved to the bank, and "fatal contradictions" emerged. Keating wanted both to build an independent bank and to "assume a Napoleonic capacity himself - in the sense of taking quick, strategic action - in the area of monetary policy".

In 1989 most of the bank's board wanted to ease rates - but one businessman was vehemently against. Fraser, wanting unanimity, resisted Keating's urging for a rate cut.

"I said to Bernie, 'We've got to be quick and flexible. This is the time to go into reverse.' But there was on the bank board at that time a standout against this. I've got the picture of him still fixed in my mind: he wore black suits and looked like a bad priest. I said to Bernie: 'Take no notice of him, he has become an old fool'.

"But Bernie ... said he had to put a high priority on holding the board as one. And I wanted to strengthen Bernie's faith in himself as an independent central banker, like the head of the US Federal Reserve. So we did nothing. He wouldn't go against this black fool, and the price of not going against him was that the monetary goose got well and truly overcooked."

Australia went into recession in 1990-91, a deeper downturn than Keating wanted, though a subsequent governor, Ian Macfarlane, praised the bank for the way it had strategically deflated the economy in 1990.

In 1994, a drought sent up fruit and vegetable prices, so inflation rose even though the economy was flat. To the surprise of Keating, who was by then prime minister, the bank began raising rates, with an overall increase in six months

of 2.75 percentage points; a structural rise of almost 60%.

Nor did the bank pull rates back when it saw the economy sag. Keating recalls Fraser said "to cut rates so close to an election would be seen as political. Can you believe that? Political. By saying that to me, they implied that they should have been cut". The bank's attitude, he said, gave Howard a starting advantage he wasn't entitled to.

Keating told Love: "The Reserve Bank's 1994 monetary policy decisions were a very bad policy misjudgement. Inflation was not at risk." He added that the bank had been hard on his government "which had already broken the back of inflation".

Keating said there was a view in the bureaucracy that "political government is there to cop it; never give the suckers an even break or, if you can manage it, never give the cabinet an even break. ... The Keating government was worn out by jumping through policy hoops which the Reserve Bank put in place".

People would have expected Fraser to have taken his view, Keating said. But "I'm told that Bernie saw me as the man in the asbestos suit, that I could take any amount of fire and still come out on top ... Because I had been prepared to go along with the interest rate structure of 1989-90, I would take 2.75 percentage points in 1994 in my stride. But I knew I couldn't carry any monkey on my back this time ...

"The Reserve Bank wanted to make a crushing blow against inflation, and thought that I would be able to run it on through the election. But this was one carry too far," he said.

"There is a point, too, where you wear the public out. One is a bit like a candle: for some time you light up the room but finally the candle burns down."