The Reserve bank guv’nor will have his chance to say more about the economy and monetary policy when he fronts the relevant parliamentary committee today.

Henry invites any reader who may be present to file a story, but Glenn Stevens can be expected to play his usual canny game. Inflation is uncomfortably high, the Australian economy is running close to capacity, the global markets are producing a welcome (and overdue) repricing of risk, any US slowing will be more or less offset by China’s faster growth (he will probably not say “overheating”), etc, etc.

If members of the committee are on the ball they will ask Stevens just how damaging could this market correction be, whether he expects the US Fed to cut interest rates anytime soon (and what would it tell us if they do), what does he think should be the RBA’s response to asset inflation and is “underlying CPI inflation over the course of the cycle” the best guide to policy?

The great thing about this exercise is its democratic nature. An unelected official with delegated authority over a major “policy lever” has to front the parliament and answer questions. Roll on democracy.

Market turmoil

Ruth Williams discusses well the issues surrounding yesterday’s meltdown and partial recovery in equity markets (with a similar movement in the US overnight):

The Australian sharemarket has suffered an intra-day drop bigger than those recorded immediately after September 11. To many people, this information would seem incomprehensible.

Several market watchers, including Shane Oliver at AMP Capital Investors and analysts at Deutsche Bank, point to the 1998 correction as the one most closely resembling this one. That was sparked by the collapse of the LTCM hedge fund – a delayed result of the Asian crisis the year before – and by Russia defaulting on its bonds.

If one takes seriously the 1998 crisis as a guide to what might happen from here there is bad news still to come.

About now in the 1998 crisis there was a brief sucker rally, followed by another downward spike. The good news is that the final downward spike plumbed a new depth but not that much deeper than already plumbed.

The trouble about the future is it hasn’t happened yet. But what is worrying everyone, as it did in 1998, is the possibility of serious contagion in financial markets. It will only require a single bank to find itself in difficulty and its game on for the crash scenario as opposed to what everyone is now calling the “correction we had to have”.

Read more at Henry Thornton