Air-bag economics

Wednesday, 22 October 2008 

I want to make sure that when we look back, that I can say to myself: it’s been tough, it’s been hard, nothing’s guaranteed, but we’ve done everything that was logically possible at the time to keep this economy as strong as possible, given the impact of the global financial crisis.

K Rudd Minding Your Money: An Audience with the Prime Minister

2UE: Do you wish you were there running it? Or is it a little too hard now?

Costello: Of course I wish I was there running it … As somebody who built the surpluses now being spent and freed the country from debt, which has now given it the strength to go into this crisis, of course I wish I was there.

Yesterday’s tiswas about the government’s bank deposit guarantee was revealing. The mini-campaign by The Australian and the coalition over whether the RBA Governor approved the guarantee did have a point. Giving one group of financial institutions a blanket unconditional guarantee to raise funding through deposits will obviously hit others who also need to raise funding. While reassuring, it has the potential to make the credit tightening worse. It is no surprise the government has moved to modify it, but inevitably it will have to still leave banks with an advantage over other fund-raisers, otherwise there was no point doing it.

But what exactly is the political point that the Liberals are trying to make? That the government should not distort the financial markets? In fact, global regulators and governments around the world, even in the US, have always gone go to considerable lengths to ensure stable financial markets. Even on Wall Street, the Fed makes the markets’ bed every morning. Every interest rate move and tax cut has an eye on not disrupting the stability of the financial markets and providing a smooth field for them to play on. Such ‘distortions’ of government intervention have been a fact of life ever since governments have had an economic role. The idea that before this financial crisis we had unregulated financial markets is a delusion jointly held by the free-marketeers on the right and the left who think the financial crisis was caused by it.

However, we have seen a step change in that government role over the last month. It may not make the financial markets work better and indeed will probably make it worse, but their crisis has made such a move a political necessity. It is this political necessity that is going to cause problems for the Liberals.

Australian politics is in a strange position at moment. It has been realigned in step with what has gone on in the US and Europe, but without the direct pain of getting there. It has however, brought out a profound change in the political environment and the way the economy is being discussed.

This change has been building for a while. Costello was on radio the other day clearly regretting that he was not in charge now. This is understandable because really we have seen the culmination of his ‘economic policy’ for the last decade. ‘Costello economics’ was about doing little more than watching a surplus build up, largely because he didn’t really have any idea what to do with it, and calling it his. The only purpose he could think for it was as a buffer if things went wrong. Now, here we are and it is Rudd doing the distributing. (Rudd claims that he does have plans for it, but in reality, Labor’s nation-building was the normal sort of infrastructure projects any government would do. As seen at the Budget, Rudd’s alternative was always more about timing than direction, which is why he left it to review on how to spend it. Even on timing, Rudd didn’t seem in that much more of a hurry).

The problem with the Liberals’ strategy now is that they cannot propose an alternative to what we have seen around the world, that governments are now stepping up to directly be involved in the running of the financial system. They may be making some correct points on the problems of doing so, but they can’t follow it through. You can see it in QT yesterday and on Lateline last night as Julie Bishop resisted Tony Jones’s attempts to push the ‘who-knew-what’ on the RBA’s advice on the banking guarantee to any conclusion. The Australian obviously had a leak from inside the Treasury (again), but neither the paper, nor the Liberals, knew what to do with it.

The Liberals are ending up on the wrong side of this and going against the tide that is taking governments of both left and right in one direction. That direction is more intervention and even when problems do arise, the solution is never less intervention, but more fixes on fixes, as we are seeing on banking guarantees. But ultimately that intervention is about little more than trying to soften the blows. As Rudd made clear on Minding Your Money, even when he acts, he is never doing anything but providing a buffer against forces over which he has no control.

How have the Liberals ended up in this position? Well, a clue is a little commented fact about the federal party at the moment. For the first time since the election, they are looking united. Disagreements between the old leadership and those sections of the party that have risen to take its place since November, have temporarily abated. One sore point was over the New Sensitivity. The old leadership’s pretence that it was some faux Thatcherite toughness that made the surplus, would come into conflict with first Nelson’s, and then Turnbull’s, bending to the current political reality. Rudd’s Uber-Sensitive response to the financial crisis has left all the Liberals on the same sceptic side and Turnbull finally playing the economic dry he likes to think he is.

Posted by The Piping Shrike on Wednesday, 22 October 2008.

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