Transcript of Question & Answer Session Remarks at the Sydney Harcourt Visiting Professorship event, hosted by the University of Adelaide

I will open up for questions; if anybody has a question I'll ask Guy one more but just grab my eye or put your hand up and we'll hand over the floor to you for questions. I'll go straight away.

Right now?

Yes if you like,

Okay so today - - -

I'm sorry just maybe give your name and affiliation.

I'm Tom [unknown].

Hopefully Adelaide alum.

The Australian dollar went up a period when there's heightened caution in the markets, would you get a perverse reaction tomorrow where possibly it goes up to 80?

So anyone who says they can know where the exchange rate is going … It provides plenty of material for these guys to generate a paper. You shouldn't believe anything anyone tells you about the future direction of exchange rates. Our best guess of where the exchange rate is going to be tomorrow is where it is going to be today, its what I learnt at MIT, and still proven to be the best forecast. It will be wrong in a predictable way rather than someone trying to tell you something otherwise which would be wrong in a not quite so clear way.

Guy I'd be interested in getting your perspective - - -

Ian – Ian.

- - - Ian Wedham from Peak. Negative interest rates is really the question, I mean how sustainable do you see that and where do you think that might end up and perhaps what sort of time frame?

I think that remains to be seen. So that was something we didn't learn about when we were in any of our educations actually. So we've had a bit of experience elsewhere in the world now with that, still very much a work in progress, I think, in terms of what the effects are. Be plenty of good fodder for future students as to how that all went. So I still think that remains an open question as to their effectiveness and I think it partly depends who you're talking about as well. I mean I would think the Swiss are a different case from others, the Swiss are sitting there with more people wanting to buy Swiss Francs than they can tolerate. I get what the Swiss, they really want to, they're saying we really, really don't want your money to come here. Which is a sort of different phenomenon than say what's going on in say Europe or Japan. As I said I still think we just haven't seen enough to know how that's all going to play out yet, I think that requires a bit more time.

Thanks very much. It's probably a related question, being a student of economic history yourself how do you think someone in 30 years' time is going to look back at QE and the unwind of QE, if they ever get around to it?

Having this discussion today, so you know quantitative easing is often called unconventional monetary policy. When we were all undergraduates what is now called quantitative easing was called monetary policy, that's what it was. Central bank expands its balance sheet, prints money, that was actually just called straight up and down monetary policy, so that was actually conventional monetary policy back then. So I'm never quite sure why it came up with the label unconventional monetary policy. Negative interest rates yes unconventional monetary policy, but quantitative easing is actually old school conventional monetary policy. You know the general idea that if you go back to again to your undergraduate days and remember the quantity equation MV equals PY: more M probably hopefully, more PY. Hasn't quite played out that way but anyway. A hell of a lot of more M but not so much on the PY side.

So you know in that sense that wasn't a massive departure from the textbook, I suppose, particularly the old textbooks. If I look at the US I think you'd make a pretty good argument the first round was extremely successful, the second wave was pretty successful and maybe there've been diminishing returns since then.

Hi Guy, Penny Diamond, Tech here, just a very generic question so definitely drawing more on your economic sort of learnings, ahead of an election in the next two weeks, and with a proposed $50 billion tax cut to business do you really believe that that's - - -

That question I'm not going to answer. I can't see how that's going to help me in any way, might help you but not me.

Well okay well – okay Michael might be able to answer it.

That was the front page today all you had to do is read their front page and you know the answer to that question.

Fundamentally look is it really going to create jobs, because the issue I have having had extensive - - -

I am so not going to go down that question.

- - - it would be a really rational answer right.

I can give you an actual answer probably not going to help me personally so I'm going to stay away from that one.

Okay well Michael I'll focus on you then. Look I mean I think - - -

Let's get – we'll get one more I don't want to ask you a question, we'll take one from Rory.

Rory's not going to ask anything controversial.

Rory Robertson I work for Westpac Group, I actually had my first degree at the mighty James Cook University of North Queensland I thought that would maximise my opportunities globally and so commiserations to all you guys who went and ladies who went to the University of Adelaide. Guy you mentioned you basically spent a lot of time monitoring markets, global markets, domestic markets, I had a question how do you manage you know that monitoring process with your relationship with other regulators? For example in particular did the Reserve Bank having monitored the markets alert ASIC to the problems - - -

Rory you know that I am so not going to go anywhere near that really.

Okay happy question. So I think Mr Draghi is sort of an MIT Alumi headed the ECB, Dr Bernanke Head of the Fed, Phil Lowe is soon to head the Reserve Bank of Australia, so with the big three Governors of the central banking world having come from MIT, it's notable the Reserve Bank soon will have Phil from MIT, Phil Lowe from MIT, Dr Guy Debelle sort of you know in the mix potentially be Deputy Governor I think, Dr Chris Kent from MIT also Dr John Simon there seems to be a pattern here, what is it about MIT? I mean not everyone went to the University of Adelaide, what is it about MIT that puts it in the sort of basically the top of the global central banking world?

So it comes back to what I was talking about earlier actually which and it's very much a legacy of sort of you know Modigliani, Solow and Samuleson and then very much taken on in particular by Stan and Rudi and Olivier Blanchard and then more recently Ricardo Caballero. It's very much an applied view, you know, economics is there for a reason and has an important role to play in public policy and all of those people I talked about were all actively involved during their careers and in fact generally simultaneously while they were teaching, partly reflect in the US being able to move from academia to public sector and back again probably – certainly happens a lot more frequently in the US then it does here. So Solow was on the Council of Economic Advisors under Kennedy which I think Samuelson was as well, Modigliano had a big role in the Italian economy and then as I said Rudi stuck his finger into any number of economies around the world including sometimes places where they didn't want him too. And then Stan has obviously has moved in and out of public sector and academia for a long, long time.

So they all came with a view that that was an important part of what economics was about. If I think about my class mates who did macro while I was at MIT nearly all of us have ended up in the public sphere, I'll just mention one of them is now the central bank Governor of Argentina. And then one of my other class mates last week was made central bank Governor of Brazil. So you know there's even in the second tier there's a decent MIT influence. But it's interesting though because probably that's been true for the last 10 or 15 years, in the period prior to that that was more true you would have said the same particularly obviously in Latin America from Chicago where you know it was the Chicago boys (that's literally that was what they were called) who basically were running macro policy, either central bank/finance ministry in Latin America for a decent chunk of the 70s and 80s. And then the 90s, 2000s and this decade, particularly the last 10 or 15 years has been very much, much more of the MIT influence coming through.

But as I said it's very much the education you got there which was it's not just theory it's applied you know needs to be applied in the real world. And that was very much what was drummed into you and very much was the conversation in terms of at least on the macro and international finance side of things.

Okay we'll take one more quick one.

I think we should take one from the host.

Yes, sorry Phil Coffey from Westpac. Guy if you think about the change that's been put through markets in the last sort of seven or eight years in terms of extra governance whether it be scrutiny, whether it be extra capital, whether it be the way that people expect markets to operate. I just wondered on your observation of how you think that will play out in the operation of markets, you've been you know closely involved in various markets as a participant and as a studier of them. There's a lot of fear that there's going to be a lot less liquidity and markets will operate a lot less efficiently in the future than they have in the past, I just wouldn't mind your observations on that.

Yeah no that's fine. I gave a talk on this a couple of days ago where I mentioned that the water analogies in all of this discussion are about as pervasive as they are in Pixies songs to go back to the conversation we were having at the beginning of the year – of the night. So my sense is that so are markets less liquid than they were a decade ago? Yep that's true, but liquidity was under-priced and underappreciated how far it was under-priced a decade ago. Now so it's I think priced more appropriately now, don't think everyone's quite worked that one out yet. Doesn't mean it's necessarily too expensive, you know it's conceivable its overshot: I don't think we know that. It needed to be re-priced, so the market structure needed to change. As I said whether that has gone too far I think is an open question, and a question worth discussing, but the fact that it's changed is desirable. The extent of the change I think is what could and should be debated, because it's not clear that it's been recalibrated to exactly the right point. I think as I said the one thing which is the message I try and get out there: so even if you don't think that where it is now is right, it is what it is, and you better realise that and adjust your behaviour accordingly. Don't expect it to still operate the way that it used to because it isn't. As I said you can debate whether or not it's right now, but it's not going to change any time in the near future, so you need to adjust to that.

I mean the market I know best from direct experience and because of the stuff I've been doing over the last few year on the foreign exchange market, and so liquidity there is less, but there are any number of forces going on there. Yes there's regulatory forces going on there, but then there's been a lot of technology change there, so the electronification of financial markets over the same period, last 10 years or so, has also changed the structure of markets in a way which I don't think we fully understand yet. And I mean the other thing which I sort of notice is that one thing which you've lost probably most obviously in the foreign exchange market is actually experience. So machines don't have a lot of experience. They have history in the sense that a lot of them are programed to run off history, but they don't actually have experience. And then a lot of people who have experience in the foreign exchange markets are not there for a number of different reasons, but they're not there any more so the market lacks experience.

So one thing which is interesting over the next 12 hours if you look at what a lot of banks are doing in the FX space, in particular, is they're actually going back to a more old style way of functioning. So a lot of them have sort of you know they're pulling back from some of the more electronic streaming, continuous streaming of prices and they're going back to the more old style: you ring me up and request a quote and I'll work it on best endeavours which is very much the old way of operating the foreign exchange market, rather than everything being done in milliseconds and electronically. So you have you know in an event like we may have over the next 12 hours you've got a more of a return to the old way of doing it and less of the way markets have been operating over the last little while. In saying that, a lot of people said oh it used to be a lot better in the old days. Well you used to get some pretty decent price action even in the old days. So the simplest way for someone to not do a trade with you in the old days was they didn't answer the phone. And you know that happened or to push the bid ask spread so no one would be willing to transact. You'd say I'm still in there in the market, it's like (a) you didn't answer the phone and (b) your prices were so wide I wasn't going to transact with you so these days you just flick the switch and turn off the machine. You know flicking the switch to not picking up the phone pretty much the same thing.

So fellow graduates we've had a well on 50 minutes of conversation with Guy Debelle he's been very generous with his time and his thoughts on the eve of you know any stuff could happen over the next 12 to 24, 48 hours so could you please join with me in thanking Guy for his thoughts.