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(generated from captions) long and exhausting week. Thanks to you and your colleagues. Thank you. A former Reserve Bank board member has accused Wayne Swan, the man Euro Money once judged the world's greatest Treasurer, of economic vandalism. Warren McKibbon today fired the broadside at Wayne Swan, accusing the former Treasurer of being reckless with the Central Bank's own reserve fund. The new Treasurer, Joe Hockey, has given the bank an unprecedented $8.8 billion cash injection to replenish the depleted fund, saying the ammunition was needed for what's coming. Economists say it's prudent to boost the bank for the uncertain times ahead. Chief political correspondent Sabra Lane reports. We need all the ammunition in the guns for what's before us. Economic management is a key battleground between the major parties and has dominated the political spotlight since the global financial crisis. A major player throughout has been the independent Reserve Bank of Australia. We've got some head winds coming out of the US in early next year and head winds coming out of Europe. The bank, though, needs a little bolstering of its own with the Treasurer granting it $8.8 billion to boost its own reserve fund which had been sitting at $2.5 billion. I want to make sure they are at their strongest. The Treasurer argues the bank needs to be battle-ready. Our institutions must be at their absolute strongest to deal with the challenges in the days, weeks and months ahead. The splurge means the deficit for the current financial year's blown out to at least $40 billion. The Treasurer's claiming credit for boosting the bank's reserve fund but blaming his predecessors for the cost involved and leaving the RBA vulnerable with only 2.5 billion in its emergency buffer.It's money that should have been allocated by the Labor Government in Government but they didn't. Despite the should
warnings they did want and they should have.The RBA's reserve fund is like a rainy day fund, a special contingency account set aside for when times are tough in the un expected happens. Until the global financial crisis it held on average $6 billion. After the GFC it was deplete ed to 1.3 billion before recovering to 3 billion. It sounds like a lot but in Reserve Bank terms it's not. The Reserve Bank holds its reserves in foreign currency and as the Australian Dollar appreciates, the Australian Dollar value of those reserves goes down. The rule of thumb I think is the right rule of thumb is about 10% of your assets in the reserve fund which traditionally would have been around $10 billion. From the last annual report we see the reserve fund was driven down below $2 billion so adding 8 billion gets back to where we need to be without crisis.The last two treasurers say the LBA never asked them to boost the bank's reserve fund. Mr Swan says if the request had been made to him it would have been granted. This to me is really a very bizarre statement because when I was on the board 2011 - I finished July 2011 - we made a very large loss because of the very high Australian Dollar. The following year after I'd left, there was a small profit of over a billion. The Treasurer was requested not to extract that from the balance sheet of the bank. He ignored that request and took half a billion dollars so that he could reach the Budget surplus in 12/13. That to me is economic vandalism. It wasn't that he may not have been asked to put more money in but hy was certainly asked not to take money out. The bank's governor, Glenn Stevens, appeared before an inquiry earlier this year. The way it works in practice is we offer a letter each year saying the earnings are this and we'd like to do whatever it is.The Mr
governor confirmed he wrote to Mr Swan sding that all the bank's profit be retained to replenish the fund. My preference was, and this was expressed, that I'd like to retain the whole 1oric 96y think it was, to build up the Reserve Bank - 1096y think it was, to build up the reserve fund. He didn't agree with that. The Reserve Bank has independence of the Government in respect to the setting of monetary policy so to hear the Reserve Bank Governor and on behalf of the board requesting that the fund be supplemented is something that I would have thought a Treasurer would listen to very cautiously.Warren McKibbon
served on the RBA for 10 years through the global financial crisis. He wasn't a fan of the Rudd and Gillard Governments. The professor says the bank's 2012 annual report made it clear the RBA's reserve fund wasn't healthy. If you look at the annual report, it's very clear that the balance sheet of the Reserve Bank was exposed completely to this scenario. If the Treasurer hadn't read page 103 of the annual report, he either didn't understand his job or he was taking a very huge risk with the Australian economy with a one-sided bet and that that bet was that interest rates would go down and the Australian Dollar would weaken. If he got that wrong, the Australian Central Bank would have had no capital. Wayne Swan declined to respond to professor McKibbon on camera. He says he's not surprised by the criticism as he didn't reapoint him to the RBA board when his term expired in 2011. He says Mr Hockey's decision to bolster the bank, blow out the deficit and raise the debt ceiling are all aimed at demonising him and the former Labor Government. The board released its annual report today, the Opposition says it makes no mention of the need for a cash injection. At no point did the Reserve Bank of Australia ask the previous Government for a top-up over and above their profits. They didn't ask Wayne Swan, they didn't ask me. The bank's deputy governor, in considered language, welcomed the injection. I think the current Government's decided to move quickly to the desired level of capital to make sure that the bank's balance sheet is of unquestionable quality and I think I see that really is in our collective interest. While the Government and Opposition squabble over the fund, the unprecedented in jection positions the bank for uncertain times. One of the great concerns that many of us who watch the Australian economy have is that the exchange rate is continuing to appreciate with the mining investment boom having come off, we were hoping of course that the exchange rate would depreciate and what that would do is stimulate other export activity to take the place of the mining investment boom. What we don't need is the exchange ryed to be going the other way. - exchange rate to