Reserve Bank of Australia governor
“I would have thought that by this point we have to conclude that simply expecting to clean up after the credit boom is not sufficient any more," he said in remarks published on Tuesday.
Mr Stevens warned that the aftermath of a bust might be so bad that monetary policy tools would be ineffective, and said it was uncertain whether the present Australian debt-income ratio would last.
The remarks, which were made at a closed-door Reserve Bank housing conference in August, reflect the challenge being faced by policymakers in Europe and the United States, where interest rates are close to zero but growth continues to disappoint more than four years after the collapse of Lehman Brothers.
Mr Stevens highlighted the danger of using monetary policy to “clean up" an asset price bust, saying low rates could create bubbles in other sectors. “The cleanup itself might leave its own toxic consequences," he said.
Reserve Bank policymakers have slashed the official benchmark cash rate by 1.75 percentage points between November 2011 and last week to 3 per cent – matching the lowest level reached during the height of the global financial crisis.
Mr Stevens’ comments are part of a long-running dispute between central bankers, academics and the finance industry over the so-called lean-versus-clean use of monetary policy.
Some economists argue central banks should “lean" into potential asset price bubbles – particularly those formed by a credit boom, as has been the case in Australia in the past two decades.
Others point to the difficulties of knowing when bubbles are forming and the risk that attempts to deflate them could cause serious damage to other parts of the economy.
“The debate has moved, it seems to me, some way towards doing a bit more leaning," Mr Stevens said, adding that monetary policy could not ignore what impact it had on risk-taking behaviour and borrowing.
“The risk-taking channel, as some now call it, is very important."
But he said monetary policy could not be successful in managing asset value cycles without strong and effective regulation.
He told the conference, co-hosted by the Switzerland-based Bank for International Settlements, that the quality of supervision might be more important than the exact detail of “black-letter regulations".
Mr Stevens’ speech included a history of Australian property booms and busts, including the 1890s collapse in Melbourne, which saw a depression that was “much worse than the 1930s".
The governor said booms in the 1980s, 1990s and 2000s after the banking industry was deregulated, pushed debt-to-income ratios higher.
“We are still debating whether that is a new, stable and sustainable higher equilibrium [on debt ratios]," he said.
“I think it is plausible that moving from a constrained credit equilibrium to an unconstrained one is, in fact, a one-time move to a higher-equilibrium level. But it is difficult to know how high that equilibrium could be."
Another difficulty was getting accurate measures of house prices.