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Stephen Long discusses Glenn Stevens' stateme -

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Stephen Long discusses Glenn Stevens' statement on interest rates

Broadcast: 13/06/2008

Reporter: Virginia Trioli

Economics correspondent Stephen Long joins Virginia Trioli to analyse the Reserve Bank Governor's
tough talk on inflation.


VIRGINIA TRIOLI: Well, economics correspondent Stephen Long joins me now to analyse the Reserve
Bank Governor's tough talk on inflation.

Stephen, how do you interpret it?

STEPHEN LONG, ECONOMICS CORRESPONDENT: It's a very hawkish speech. It doesn't change the policy,
Virginia. It doesn't mean that rates rises are imminent, but it really does underline what a big
threat they see with inflation. And the tone was what was different in this speech. It wasn't so
much the message, which is consistent with the core message for a while, but the language was very
forceful, particularly when Glenn Stevens spoke about the implications of that terms of trade

VIRGINIA TRIOLI: It was also as if we were being put in our place a bit. "You have to stop spending
money, you ordinary people, to allow the mining boom to have its way."

STEPHEN LONG: That was the most significant thing in this speech and that was what was new: the
Reserve Bank Governor's observation that, basically, households had to cut back on spending to make
room for the mining boom. He says you can't have a consumption boom from households and an
investment boom at the same time and with big infrastructure spending by Government as well as the
mining investment, something has to give - it's households. That has big implications. It means
that you've got to see less spending in shops, but it also means that less spending on housing is
on the cards. They want to force that by continuing higher rates and that could go on for some
time. We're talking not months, but possibly years if the inflation threat remains.

VIRGINIA TRIOLI: Now, I know that the Reserve Bank is trying to play down at the moment the threat
of the credit crunch, but when we see a behemoth like Babcock and Brown fighting for survival, that
seems to indicate the problem is perhaps even bigger than we've discussed on this program.

STEPHEN LONG: Breathtaking falls in the share price of Australia's second-biggest investment bank,
down 50 per cent in two days, down 81 per cent over the course of the past year and it really is in
a situation where it's having to have crisis talks with the bankers. That said, it's not like one
of the big US investment banks or Macquarie. If it was to hit the walls, and at this stage that
doesn't look necessarily to be on the cards, then it's not a tragedy. And, it does underline,
though, what we've seen for quite a while now, that people who follow this model of using cheap
debt to fund the purchase of assets and leveraging up during the times when credit was cheap and
asset prices are rising, are getting crunched now on the other side of that cycle.

VIRGINIA TRIOLI: You've indicated in passing that it's unlikely that it might hit someone or
something like Macquarie Bank. That's been the discussion of course: is Macquarie next?

STEPHEN LONG: Well, this is the Macquarie model that Babcock and Brown was following, but so far
Macquarie has been insulated. It's a bigger fortress. It's harder for speculators with hedge funds
who've been trying to target companies of this kind to hit. Its share price did fall by 50 per cent
from the good times during this, but the big question, really, is do we see those real top end
fortress companies, who followed this model, get hit? That'd be the real crunch time if that was to

VIRGINIA TRIOLI: Stephen Long, thank you.

STEPHEN LONG: You're welcome.