A BRIEF ANALYSIS OF THE GLOBAL FINANCIAL CRISIS WITH SPECIAL EMPHASIS ON AUSTRALIA AND THE ROLE BEING PLAYED BY THE PRIME MINISTER, KEVIN RUDD
written 8 February 2009
To talk about economics requires more and more, that one write about politics.
Paul Krugman "The Great Unraveling" published 2003.
All countries which accumulate debt and habitually run big current account deficits are vulnerable. And for many centuries societies have been susceptible to irrational booms, South Sea Bubbles, tulip bulb booms, and dot-com busts. But no central bank can offset the cascading effects of bad government policy.
Peter Walsh, former Labor Party Finance Minister, Financial Review, 10/12/2003
The team that brought you "Financial Reckoning Day" reunite to provide you with the first in-depth look at how the American character has shifted to accommodate its new imperial role; how we have abandoned the private virtues of personal liberty, economic freedom, and fiscal restraint; and how the guv’mint has gained control of public life and the economy. The result has been, among other horrors, unfettered deficit spending, gluttonous consumption, and fearless military adventurism. All the while the nation slouches ever more precipitously towards bankruptcy.
Cover sheet "Empire of Debt" 2006 by Bill Bonner and Addison Wiggin
The Republican Party, now in the grip of the Reagan forces, had abandoned the reality of the retail world in which politics had always been done; they had put emotion to work in the service of ideology. The politics of the nation had been given into the hands of the salesmen, and it was certain that the salesmen would win, for they had learned the secret of modern politics, which is that no one can refute the arguments of the heart.
Earl Shorris "A Nation of Salesmen: the tyranny of the market and the subversion of culture", 1994
The political home of neo-liberalism in Australia is, of course, the Liberal Party itself………………………….In the current crisis, social democrats therefore have the great advantage of a consistent position on the central role of the state…………………………….For social democrats, it is critical that we get it right – not just to save the system of open markets from self-destruction, but also to rebuild confidence in properly regulated markets, so as to prevent extreme reactions from the far Left or the far Right taking hold……………Social democrats can chart an effective course that will see us through this crisis, and one that is also capable of building a fairer and more resilient order for the long term. This can only be achieved through the creative agency of government – and through governments acting together.
"The Global Financial Crisis", by Kevin Rudd et al, The Monthly, February 2009.
In the middle of what he describes as the worst economic crisis since the Depression, Prime Minister Kevin Rudd has decided to launch a divisive personal crusade against so-called "neo-liberalism". Rather than economic solutions, Rudd is seeking ideological retribution………………..Economics is not the monolithic ideological edifice Rudd seems to think…………..If you look at the present size of the public sector and the level of spending in Britain, the US and Australia, the only fair conclusion you can draw is that neo-liberals failed to successfully implement their agenda. In all cases the public sector is about the same size, and in the case of Britain and the US, public spending and debt have ballooned. Rather than neo-liberalism, the past 30 years have seen a form of stealth Keynesianism dominate economic policy.
Michael Costa, The Australian 6/2/2009, "Rudd on a dangerous, ill-informed crusade"
UPDATE REMARKS (today 1 September 2009)
THIS ESSAY was written in February 2009 and is re-produced here as it appears to be more pertinent now than when many (some of them self-serving) were exaggerating the ‘global financial crisis’, which now seems to have been not much of a crisis at all. All that was required was to simply throw large levels of fiscal and monetary stimulus at the problem. Keynes had done it before so that it was an old recipe. But it still seems to us that not enough current attention is being given to the basics – structural, systemic, and attitudinal – especially in America. The cult of ‘the free lunch’ has returned. The imbalances that provoked the ‘crash’ seem omni-present.
Australia is in relatively good shape. According to Westpac Economics our economy will grow at +0.2% for calendar 2009 in a world expected to regress at -1.2%. The underlying reason is our proximity to Asia where the Chinese economy is expected to achieve growth of 8.5%. But all of these figures are relative. In ‘normal’ circumstances the world should grow at around 3% per annum which means that world output doubles about every 24 years. Australia’s domestic economy enjoys high per capita GDP, a stable banking system, generally sound infrastructure, relatively full employment, a stable housing sector etc. But as a major trading nation we cannot expect immunity from the global economy.
PROLOGUE (written 8/2/2009)
This has been written to attempt a brief articulation of a major concern that far from saving Australia from the ‘global financial crisis’ the actions, rhetoric and policies of the current Australian government are going to totally immerse us in it, or delay our recovery from it, or both. We are just 1% of the global economy. Time is needed to see where the stimulus packages of China, America and Europe will lead the world. Current local policy prescriptions seem to be pre-emptive, excessive, and poorly targeted.
Ecinya has suggested that payroll tax relief, personal tax cuts being brought forward, and some relaxation of capital gains taxes for long-term residential property holders upon sale would provide sufficient short-term relief. We are totally opposed to the $950 per person hand-out which apparently will cost about $11 billion and we don’t understand the pre-occupation with direct infusions for commercial property as opposed to working through the banking system. We are strongly in favour of infrastructure spending, but the schools programme is blatantly political and can unfold more slowly than currently envisaged. Some of the ‘green’ programmes seem also to be politically inspired.
On the rhetorical side we have suggested that ‘balanced free enterprise’ replace ‘capitalism’ and ‘socialism’; that ‘beneficial trade’ replace ‘free’ trade; and that the Chinese Communist Party change its name to the ‘China Central People’s Party’ to mitigate cheap shots from the west during its past 30 year transition and integration into the global economy.
(postscript 11/2/09: Two of my confidants (esteemed colleagues) found it an unwelcome and irrelevant diversion that China should be mentioned in this prologue. They seemed sufficiently chastened when it was pointed out to them that China was currently central banker to the world economy, that China and the US between them account for close to 30% of global GDP, that China had provided about 25% of world GDP growth over the past 8 years, and therefore, needed to become a fully fledged member of the global financial community. The word ‘communist’ enables rednecks and assorted ideologues to treat them with insufficient respect.)
We do not share Mr Rudd’s convenient faith in the International Monetary Fund and despite our long-held support for Mr Obama (since 2006) his success is far from guaranteed, given the recent performances of the US Congress and statutory agencies. He has to overcome significant congressional obstacles and tear down some false fiscal and political gods and prophets, and embrace some others with his own balanced perspective.
Prosperity is the tide that carries us to realisation of our social and material aspirations and re-leveraging the public sector to de-leverage the private sector is fraught with difficulty and invites unintended consequences. One cannot help but feel that Mr Rudd is out of his depth and being overtaken by his personal ambitions
THE ECINYA RESPONSE
Even at schoolboy level we are taught that the daily economic battle is between ‘wants, which are unlimited in extent and variety, and resources, which are limited.’
The Austrian school of economics places great emphasis on the fact that mis-allocation of (scarce) resources is at the epi-centre of sub-optimal or bad economic outcomes. Bad policy is bad policy. Good policy poorly implemented results in bad outcomes. The results are all too obvious – inflation, high interest rates and taxes, low productivity, excess capacity, current account deficits, poor health-care etc.
THIS RECESSION has been a long time in the making. It has been an evolution and no talk of ‘revolution’ or the adoption of one of the ‘isms’ such as ‘social democratism’ will achieve a sustainable solution. It is equally true that laying the blame at the feet of any other ‘ism’ provides an unsound framework for sustainable solutions.
BUT if we had to choose an ‘ism’ we would select ‘common sensism’. In economics, what doesn’t make good common sense is hardly likely to make good economic sense. There is no single ‘ism’ that fully explains what has happened, what is happening, and what will happen. The world is a hybrid – all of the ‘isms’ swirl around in a dynamic framework, sometimes winning and sometimes losing. This can be referred to as ‘cycles’.
Prime Minister Rudd’s lengthy essay, written in conjunction with advisors and colleagues "with common interest in the ideological origins of the current crisis", adds nothing to the debate. Rather, it gets lost in an intellectual indulgence that fails to understand the role of the government in context of a parliamentary democracy where even the Opposition is elected to give voice to the people. "President" Rudd, just like Messrs Bush and Cheney, believes in Executive Government where parliament is expected to endorse, support, anticipate and agree with the Government of the day. It is convenient to label dissenters as ‘ideologues’, ‘radicals’, ‘racists’, ‘neo -liberals’, or ‘the do-nothing brigade’.
Mr Rudd’s "analysis" leaves out some important contributing factors – the role that the Australian states play in industrial relations, in health, in education and other areas of spending such as infrastructure, and for the most part of the recent boom, those states were Labor. Mr Costa, in the article mentioned above, says: "So deregulation, privatisation, greater market competition and expanded private participation in equity markets through compulsory super, is OK if it’s undertaken by Australian Labor governments, but it is neo-liberal ideology if anybody else does it. All the way through his essay Rudd tries to have it both ways, cherry-picking economic history to support his political prejudices."
Ecinya respectfully suggests that Mr Rudd has been caught by the gentle breezes of Kirribilli House, the star filled nights, the easy harbour-side celebrations, and with aligned minds in attendance, each with a glass of chardonnay poured from the public purse, is moving to govern through the prism of his ego or his own lack of self -esteem, or some other psychological disorder. There is no air of quiet confidence that creates a sense of managerial competence. Rather, there is a sense of papal infallibility. If God had meant politicians to lie he would not have invented behaviours like obfuscation, false and misleading and deceptive conduct, innuendo or delusions of grandeur. Mr Rudd was elected to govern, not ordained. Government is principally about economic management, law and order, and future investment (education, social and commercial infrastructure).
On a more global perspective he fails to mention the economic leakage caused by the wars in Afghanistan and Iraq, and the major transfers of wealth caused by the oil price surge, and the out-sourcing of global production to China, India, Mexico, Brazil, Canada and elsewhere. Essentially, Mr Greenspan gave the world this recession, this ‘crisis’, by creating a false economic boom to hide a war based on falsehoods. This is a ‘made in America’ recession. Led by the local branches of the Wall Street machines like lambs to the slaughter, we all participated with gusto and glee. The music has stopped, the game of musical chairs is over, and many old maids find themselves unseated. A wolf in sheep’s clothing provides no solution.
A RECENT ECINYA SURVEY
Three weeks ago (January 2009) we asked 8 of our confidants to join our editor and to write down their five major fears/ worries for 2009. This gave us 45 responses (9 times 5).The table below summarises the results
Responses
- US in all aspects, $US, Obama… 10……………………………………………………….22%
- Australian government policies & abilities… 8………………………………………..18%
- Deflation – recession deepens, asset values continue decline… 6………. 13%
- Geo-political – oil price, middle east, wars etc… 4…………………………………… 9%
- Wages and employment… 3……………………………………………………………………. 7%
- Banks willing to lend, bigger bank losses… 3………………………………………….7%
- Confidence – market, DIY super losses… 2……………………………………………. 4%
- Public & private debt levels… 2……………………………………………………………….. 4%
- Drugs, alcohol, law & order… 2……………………………………………………………….. 4%
- Australian management… 1……………………………………………………………………. 2%
- China over-saves… 1………………………………………………………………………………. 2%
- Trade wars… 1……………………………………………………………………………………….. .2%
- Energy policies globally… 1……………………………………………………………………. .2%
- Resources bust… 1………………………………………………………………………………… 2%
- X factors… 1…………………………………………………………………………………………….. 2%
We found the second most dominant fear to be interesting and consonant with our own fears. The Hawke-Keating government were sound economic managers, before turning into micro-populists, mainly instigated by Mr Hawke in his final term. The Howard-Costello government were sound economic managers before turning into micro-populists, mainly instigated by Mr Howard in his final term. Transition is just as important in government as it is in business, and poorly orchestrated leadership changes are costly for taxpayers.