The financial crisis the Government wants us to have

19 Comments

Joe Hockey

The Reserve Bank’s decision to lower interest rates last Tuesday – which surprised many – shows that the Australian economy is by no means fully recovered from the Global Financial Crisis (GFC). Indeed new pressures are beginning to take their toll, not least the downturn in commodity prices and decline in Chinese growth rates.

The Treasurer Joe Hockey suggests that if his government continues on its path of ‘fixing Labor’s mess’, this will give the Reserve Bank space to continue adjusting interest rates, to the benefit of borrowers and the economy.

There are four points need to be made in response. 

First, the Reserve Bank is cutting rates because the economy is slowing, not because the government has been adequately dealing with the ‘debt and deficit crisis’. 

Second, it seems that cutting interest rates all the economic policy elites believe they have available in their armoury to assist them to manage the macro-economy. 

Third, as a result of this focus on the financial system and the supply of credit, the Reserve Bank is helping to fuel an asset price bubble, particularly in real estate. Ever since the GFC, government and Reserve Bank policy has been the equivalent of trying to help a drunk alcoholic by picking him up off the floor, propping him against the bar and giving him another drink. 

The fourth point is that the Treasurer’s ‘debt and deficit’ mantra is simply not true. 

According to Mr Hockey, we need to deal with the debt and deficit crisis by undergoing a process of austerity through cuts to public spending, and further erosion of the welfare state through measures such as Medicare co-payments.

This is false. Australia has largely avoided the worst symptoms of the economic crisis that almost brought the global economic system to its knees in 2008. This is actually a source of disappointment to the free market fundamentalists in the government. Their colleagues in other parts of the world used the crisis to regain the upper hand in a debate that, by all reason, they should have lost, and to reassert their control over economic policy making.

Most Australians of a certain age will remember Paul Keating’s ‘recession we had to have’. Hockey is now creating the crisis the Liberals want to have so that the Coalition Government can implement a radical free market agenda that has no broad support in the Australian community, as the Queensland election result and the parlous state of the Abbott Government’s fortunes demonstrate.

In 2008, massive spending by the Rudd and Chinese governments managed to protect Australia from the worst of the economic crisis that beset the rest of the world. In Britain, Europe and the US the crisis initially represented an existential threat to the present system of financial capitalism, a threat that was overcome by shifting the mountain of toxic debt from private to public balance sheets. 

What was in reality a profound crisis at the heart of the debt-fuelled, inflated asset price system that is contemporary capitalism, manifesting itself particularly in over-inflated housing markets, could then be re-sold as a crisis of government debt caused by excess spending, especially on social programs.

Australia, with relatively low levels of toxic debt and highly profitable banks, did not have the kind of banking problem that beset many other nations. But because of the interconnected nature of the global economy, it was exposed nonetheless to the global credit crunch and economic downturn. In the face of collapsing private demand the government’s only real option if it wanted to avoid recession or worse was to increase demand through government expenditure financed by increased borrowings. 

This is what occurred. In either case, whether through taking toxic debt off private balance sheets or propping up demand through public spending, the result was to increase the level of public debt. When markets fail, only governments can rescue the system. But the important thing to be clear about is that government debt increased as a result of the crisis: it did not cause the crisis.

In the wake of the collapse of several major institutions, such as Lehman Brothers, when even Alan Greenspan was experiencing a crisis of belief in the inherent stability of the new capitalism and its ability to deliver never-ending growth, it seemed that neoliberalism had finally been exposed for what it is: an economic doctrine of little theoretical or empirical integrity. Yet that was to under-estimate its strength as an ideological and political movement based in the real class power of the global political and economic elites. If there were any doubts about neoliberalism’s political and cultural power, they quickly disappeared. The primary means by which this dominance was maintained was the rapid propagation of the myth that the crisis was the result of excessive government debt and spending.                           

Hockey is following the neoliberal playbook with precision: manufacture a crisis of government debt and expenditure; get an ‘independent’ commission to come up with recommendations to deal with it; ensure that many of the recommendations are extreme in order to reinforce the severity of the ‘crisis’ and to give cover for subsequent, slightly less extreme policies; finally, introduce a milder form of the commission’s recommendations, which are still more extreme than would have been possible without the manufactured crisis, arguing that they are all necessary because, as the ‘independent’ commission says, there is a crisis to deal with.

By this devious means, Hockey’s goal is to further strip the public sector and extend the reach of market processes into all aspects of existence. The attack on universal health care is one example.

This is not to say there are no structural problems in the Australian economy. There are. Some of them are specific to our country, while others are shared across the global economy. One of them goes back to the way Australia managed to avoid the worst of the global financial crisis, and has its echoes in the Reserve Bank’s latest rate cut. This has nothing to do with the massive pumping of money into the economy by the Rudd government, which saw a large, but by no means catastrophic, rise in government debt – which is what Joe Hockey would have us focus on. 

The long-term problem is that Rudd’s response did nothing to reduce the asset price and debt spiral that is the underlying cause of the global economic crisis that continues to haunt the world. Indeed, aspects of Rudd’s response, specifically increasing the First Home Owner’s Grant, and the Reserve Bank’s unavoidable, and continuing, lowering of interest rates, were specifically intended to prevent the asset price bubble from bursting. The continuing mad inflation of Australian housing prices is the result. 

The other, global, structural problem is the fundamental lack of viability of an economic system founded on ever-growing credit and relying on never-ending, environmentally unsustainable growth to meet the interest payments. Now that is the basis of a real crisis. 


Colin Long

Colin Long is Victorian Secretary of the National Tertiary Education Union and President of the Victorian Trades Hall Council.

 

Topic tags: Colin Long, economy, austerity, Joe Hockey, GFC, free market, Reserve Bank

 

 

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Existing comments

Thanks Colin - it's so good to now and then see the truth so simply stated. The budget can be balanced, the debt can be paid off by simply taxing the wealthy again: the Howard tax cuts amount to $20 billion each and every year. $20 billion every year that the government could have to spend on what we need. Were not the well-off doing well enough before they were given this extra $20 billion every year? This Abbott Hockey incompetence is looking more and more like the Fraser Howard disaster - what we will see is rising unemployment, declining growth and bigger government deficits. A lot of people's lives are going to be messed up and the environment will continue to degrade ... it takes a disaster before some people will notice.
Russell | 06 February 2015


Perhaps an even greater "crisis" is the miserable standard of political debate in Australia. An income tax increase of a few percent on all taxpayers would probably put the budget back into surplus and allow us to enjoy the services, health care, public education etc that we have come to expect. But both major parties carry one as if that option is unmentionable. Maybe it should be known as the Voldemort option.
Brian | 06 February 2015


Precisely Russell, this government's refusal to consider raising taxes that it alone can levy on high income earners and on corporations that shift profit overseas is deplorable.
Ginger Meggs | 06 February 2015


The other side of the ledger is income. Very little has been done to increase income in place of, or, as well as minimising expenses. Tax avoidance and tax law should be looked at so that those who can afford to pay, do pay their proper share within our progressive taxation system.
Patrick Kempton | 07 February 2015


I must confess that when I read the title to this article I scrolled down to find out who Colin Long was and what credentials he had to write on 'The Financial Crisis the Government wants us to have.' As a result when I read the article I read it like a tutor ticking every sentence of an economic student's essay who shared my anti-capitalism bias. What is needed now is for the ALP to encapsulate Mr Long's ideas into slogans of not more than five words. When I listen to Vox Pop interviews on the wireless on the subject of, for example, the Coalitions achievement during the past fifteen months, I hear again and again: 'They've stopped the boats.' 'They've abolished the carbon tax.' and the like. The negative consequences of these achievements do not appear to have penetrated the consciousness of the interviewees. Surely it is not beyond the competence of the ALP's numerous media advisers to come up with some succinct form of words that all ALP parliamentarians (I hope) could use to rebut the Coalition's lies and half-truths.
Uncle Pat | 07 February 2015


Long's article is excellent in many ways but it is wrong in denigrating economic growth. The highly recognised economist, Keynes, clearly demonstrated the need for economic growth to maintain a high level of income for the "working classes" in the capitalistic system which, properly managed, is a better system for them than, say, socialism, which is demonstrably low growth and low income for the working classes - just look at the history of East Germany under that system, and others
frank hetherton | 07 February 2015


And of course the other thing that was so attractive to our present-day unliberal Liberals, besides the stroking of their ideological egos, was the thought that this 'clever and far-reaching strategy' would be an anti-Labor gift that would just keep on giving. "You already suspect Labor can never be trusted to manage the economy (because we keep telling you so), and that's why YOU have to suffer now. None of this would be necessary if YOU hadn't been so silly as to vote Labor, but YOU are now paying the price for your silliness. We have to be so harsh on YOU specifically, because you will only learn through the harshest aversion therapy. Now you're NOT going to be silly like that again, are you!"
And it was working, except for the fact that this chaotic and incompetent federal government haven't been able to keep their stories straight or (in the case of Abbott) his personal foibles in check, much less persuade necessary others of their correctness. So what do Abbott and Costello, sorry Hockey, keep doing? They keep repeating the lines they learned before, like poor comedians who don't get that their jokes aren't funny.
Paul | 07 February 2015


Thanks Colin - as Russell says, it's good to see truth simply stated.

While Russell proposes that Howard-era tax cuts be reversed to remedy the situation, I'd like to see a range of other measures.
1) Post-secondary education funding be sustained through qualification-dependent payroll levies, in return for decrease in Company Tax rate; this way, companies that don't employ graduates aren't cross-subsidising the profits of those companies that do.
2) (Revenue-neutral) Consumption Tax on Fossil Fuels (FFCT) instead of ALP's Clean Energy Futures package; trouble with ALP's tax on emissions is that it only applies to emissions in Australia - incentivising Australian manufacturers to shut their Australian operations and import stuff from non-taxing jurisdictions. A Consumption Tax, on the other hand, takes into account all the fossil fuel consumed (proxy for CO2 emitted) from raw material all the way to final retail purchase (consumption) - so goods manufactured overseas and then shipped to Australia on oil-burning ships actually pay MORE FFCT than goods made in Australia - and FFCT is entirely WTO-compliant.
I'm still amazed that the Party for Australian workers (ALP) didn't go for this option.
David Arthur | 07 February 2015


First the headline. Does Colin Long seriously believe the Government “wants" us to have a financial crisis? That is nonsense. I don't agree with a lot in this article. The Federal Budget has a problem. We overspent in our response to the GFC. This was the start of our debt problem. I think it was added to in the ensuing years to fund ongoing expenditure - itself unwise financing. And if you look at the Forward Estimates and see how health and social expenditures including NDIS (fundamental as these are) are ballooning, we do indeed have a Budget debt and deficit problem. Not just Hockey but Martin Parkinson repeatedly spoke of this. So there is every good reason to cut back on middle class welfare (but not for those on lower incomes who need it), and to streamline government where we can. Tax changes will have to await the next election, with foreshadowing in the lead up. A problem - not just in Australia - is that any time any government of either colour tries to address such Budget structural problems there is great opposition and it is difficult for the government of the day to carry it through.
Bill Frilay | 07 February 2015


What we really need is a new National Bank - one that works for US!

Currently, "Quantitative Easing" is a process whereby other countries create as much money as they want from "thin air", then come and use that money to buy OUR assets and chanrge us interest.

The Reserve and Commonwealth banks used to create our money for infrastructure and the like, so Bob Santamaria told me. I confirmed it, and it is time to do so again, or we will end up like Greece.
Clem Clarke | 07 February 2015


I doubt Hockey has the wherewithal to have worked that out for himself.Doesn't mean that some of his minders haven't though
max sutter | 08 February 2015


Thanks Colin. you make some good points and I agree with most of your analysis. In general we should be putting more tax-payers money into the hands of the poor, because they spend it, and less into the hands of the well-off because they just save it. We need jobs and we do need effective growth by better use of current capital. ! Howard should have saved the good-luck money of the mining boom rather than spent it as if it was going to be permanent. Now that the terms of trade have moved against us a number of things need to happen: those give-aways in middle-class welfare should be clawed back; negative gearing and some of the superannuation largesse to the rich should be phased out; any new large scale government spending should be postponed, whether that was for familes, women or school etc (NDSI in a focused form may be one cost-effective exception); health and educational services should be made as cost-effective and equitable as possible across the board which might actually improve them (rather, for example, than the current crude ideological attack on GPs and the poor using Medicare rather than all the are rorts throughout the system); and the economy need to be a lot more productive which means rolling back the soft-deals the unions made in the good times, and the partisan arrangements constructed by Gillard to keep the unions of board to keep her in power. The left also needs to get its act together, Colin. We don`t have a crisis now but sensible stuff needs to happen before we do! Let`s hope Malcolm can deliver fairly for us all.
Eugene | 08 February 2015


" we do indeed have a Budget debt and deficit problem" ... no we don't. Not the OECD or IMF or anyone else thinks that Australia has a government debt problem, government debt is relatively small. Private debt is another thing - think of all those 'investment properties' people think they will need to have a financially secure old age! The deficit is a problem and can be easily solved by increasing taxation. The well-off managed to struggle along before Howard gave them so much more. Of course we could just leave the debt to future generations since they'll be wiped out by climate change - problem solved.
Russell | 09 February 2015


Infuriating to read comments or commentators that believe taxing the wealthy will pay every back...no one else does anything?? Who takes risks to establish big business? Who employs? Big Business Who keeps money ticking over in hundreds of homes and families around this country? It is not so simple...with more and more on welfare and less and less businesses surviving...have a look at country towns...time to have a far broader view than to say that taxing the wealthy is the answer. With that mentality half the nation can sit back and wait.
Jackie | 09 February 2015


Oh that we could introduce democracy to our poor fella country. That would require confining political influence to the people by: 1. Removing it from the trade unions representing about 6% of the people (including the non-workers)2. removing it from the "top end of town" representing less than 1% of the people 3. removing it from all lobbyists representing themselves and none of the people. 4. Removing all of the inequities in society that these wreckers have won for themselves. Easy but highly improbable! But please, ES, spare us the self-interested rubbish of any of them.
john frawley | 09 February 2015


Governments over the last 30 years have arranged affairs so as to increase inequality - reducing taxes for the well-off etc. Apart from the fact that economists now seem to be saying that inequality is bad for economic growth, there is the moral aspect to implementing policies that increase inequality. I suspect the Pope will soon be asking Catholics to imagine what Jesus would do if He had his hands on those policy levers.
Russell | 09 February 2015


An incisive and insightful article. Our current national leaders appeared to think the only way to get elected was to treat us like a bunch of economic and political naifs. The other weapon in the current PM's arsenal was to dissimulate about planned economic "reform" before being elected. Now the catchphrase appears to be "I've changed. Trust me." Sadly, not one of the people mentioned as a possible contender to the PM has disavowed the government's current economic policy. The controlling elite of the Liberal Party seem very much out of synch with the general populace on this issue.
Edward Fido | 10 February 2015


After the GFC, governments across the world were expected to reduce their debts and leverage in order to avoid another crisis. The opposite has happened. Total global debt rose by $57 trillion from the end of 2007 till the second quarter of 2014 and the Financial Times recently warned of another looming financial crisis.
In Australia since 2007-08 Commonwealth spending grew by 53 per cent while federal revenue grew by only 29 per cent. Australia’s cost of servicing debt is now $15 billion a year, and big items like schools, childcare, medicine and pensions keep rising every year.
Our welfare and health systems are of enormous benefit to older Australians but are at the expense of future generations. When governments accumulate huge debts which can’t be paid off for decades, it amounts to one generation stealing from the next. This is an issue of social justice which is always ignored by those who profess to be concerned about social justice and fairness.
The only people who prosper in time of chaos are radicals. And because inflation hurts the poor more than the rich, one can only wonder why very wealthy people like Warren Buffett and George Soros support big-spending governments.

Ross Howard | 10 February 2015


I sent this letter to all the candidates prior to the NSW election. Essentially, if you create money from thin air in huge quantities such as happened with the "bailouts" in the USA and Britain, and even more throgh "quantitative easing", then massive distortions occur. We really need a new Development Bank such as we had previously, so that we can create the money we need at low interest (or no interest) to create the society we can have. It just takes the will. See more here, including a chart showing how much of our major corporations are owned by JP Morgan, HSBC and Citicorp. http://www.makingabeautifulworld.com/nsw2015
Clement Clarke | 10 April 2015


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