You’ve heard of activist judges? Right now, we’re seeing activist central bankers, with the Reserve Bank under Glenn Stevens becoming more and more bold in its interventions on economic policy — doubtless encouraged by the widespread view across business, markets and the commentariat that the Abbott-Hockey government isn’t up to the job of economic reform.

The latest intervention, on negative gearing, is sure to infuriate Abbott and Hockey, who are piously calling for a “mature, sensible debate” on tax reform but demanding that other governments lead it and demonising any proposal that Labor might produce for reform. Not merely has the RBA in effect called for reform of negative gearing, it’s raised the spectre of financial instability caused by the way it encourages investors to pile into real estate. That is, negative gearing isn’t just bad policy, it’s dangerous policy.

As part of the bank’s submission to House of Representatives Economics Committee’s inquiry into home ownership, it singled out the combination of negative gearing — being able to deduct losses against other types of income — and the 50% tax discount on capital gains for giving people an incentive to speculate on property prices, and to do it with debt.  The RBA instinctively doesn’t like too much leverage in the financial system or the economy (and even less so these days in the wake of the financial crisis), and the RBA makes a clear case that property investors, including those with self-managed super funds, are gearing up and are driving other buyers from the housing market — such as first-home buyers:

“Given the value Australian (and other) households place on home ownership, policy should not unduly advantage property investors at the expense of prospective owner-occupier home buyers. Financial stability considerations would suggest that tax and regulatory frameworks should avoid encouraging over-leveraging into property, whether by owner-occupiers or investors.”

The bank concedes there may be some benefits from the policy (it could limit the growth in rents for tenants, for example), and it is certainly not the only reason house prices are so high, especially in Sydney and Melbourne. But the bank says that after more than 15 years, these two policies working together have helped create a housing market that it has said in the past it believes is “unbalanced”.

That is consistent to the views of Treasury Secretary John Fraser earlier in the year, when he told a parliamentary inquiry that he thought the Sydney property market and parts of the Melbourne market were in a bubble, and Stevens himself, who described the Sydney property market as “crazy”.  The RBA is also on the same page as the Murray Inquiry. The inquiry said in its report that the tax breaks for housing encourage “speculative investment,” which increases risks in the economy.

Abbott and Hockey aren’t having a bar of that — any changes to negative gearing have been ruled out; Abbott actually said in Parliament he wanted Sydney prices to keep rising because he had a house there, and as part of the government’s “mature, sensible debate” on the weekend said changes to confine negative gearing to new housing being considered by Labor would “destroy the rental market in most of our major cities”

Hockey continued in a similar vein yesterday in what turned out to be a very short-lived effort to reanimate the tax debate. “Individuals should be able to deduct the expenses of a business or an investment against their primary income. That’s a principle,” he said.”By removing negative on real estate as some are suggesting … they are creating an exception to a standing rule in taxation law, and that is that you can deduct the losses against another form of income. That [abolishing negative gearing] would be creating another exception.”

Another issue highlighted by the RBA was a change in 2003 that allowed self-managed superannuation funds to borrow and invest in property. It said this had increased the “potential pool” of investors at the margin. The Murray inquiry was particularly unhappy about this (as the RBA’s submission to Murray was), and recommended it be scrapped. In April, Assistant Treasurer Josh Frydenberg said the Federal government would be regulating borrowing by self-managed superannuation funds, but he rejected an outright ban on property, suggesting there’s unlikely to be any significant change in the area.

On top of the Bank’s public criticism of financial industry culture — contrary to the government’s head-in-the-sand attitude toward some of its biggest donors — and complaints about the lack of an infrastructure investment pipeline, this is another blunt statement from the RBA that the government’s policy paralysis has real potential to inflict economic damage. Too bad the Bank is independent of the government and, until Glenn Stevens’ term expires next year, there’s nothing the government can do about the musings from Martin Place.