A BRIEF ANALYSIS OF THE GLOBAL FINANCIAL CRISIS WITH SPECIAL EMPHASIS ON AUSTRALIA AND THE ROLE BEING PLAYED BY THE PRIME MINISTER, KEVIN RUDD.

 

OVERVIEW

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.

 

CONTEXTUAL ESSAYS (please click essay title for full text)