Thursday, 16 October 2008 

Turnbull may have looked bombastic getting on TV to do his own national address last night but he had little choice than to at least stake his position. Of course his claim that the government should have seen the warning signs earlier made little sense other than to try and put his and Nelson’s pseudo-populism over the last few months in a favourable light. Equating that with Rudd’s $10bn hand-out will cut little ice with voters as if there is one thing Rudd knows how to do, it is to make his highly popular actions look like brave statesmanship.

However, behind this, Turnbull put his finger on two weaknesses that may come back to cause problems for the government. The first is that this hand-out has been done for political rather than economic reasons. This is why the government keeps being asked for the changed economic advice and forecasts from the ones Rudd was talking about only a few days before when he brandished the growth “with a two in front of it” forecast by the IMF. In fact, in Parliament yesterday, Rudd still seems to regard those IMF forecasts as valid. When asked on what basis he decided on the hand-out, he said:

The basis of the economic advice lies in the IMF public report on the state of the global economy and the growth projections for the major developed countries going forward.

The problem here is that if, for example, the Chinese economy still holds up, and growth in Australia does still continue, Rudd could look like someone who blew half the surplus in a panic. He could still claim that growth held up because of the package, but how a one-off spending spree in the next few months could sustain growth beyond that would still have to be explained. As seen by Julie Bishop’s clumsy handling of it last night, this is a difficult line to hold, but at least the Liberals are finally positioned back on the non-populist side of the debate where they need to be.

The second line is even more unpopular for the moment but also could cause Rudd problems at a later date, his relationships with the banks. As a practical measure, Rudd’s announcement to tackle the ‘extreme capitalism’ of banks through the pay of their executives is, of course, utter nonsense. Firstly, we have been told that Australian banks are strong and have acted responsibly, so why is the pay of their CEOs a problem? Secondly, even on Wall Street, the job of CEOs is to maximise profit for their shareholders which, if they do not do so, especially on Wall Street, they are quickly dumped (albeit with very generous pay-offs). The ‘greed’ that Rudd is talking about is surely that of the shareholders that demand their CEOs find ways to maximise profits. Is Rudd suggesting that bank profits should be constrained? Of course not, when he has just been boasting how profitable Australian ones are. It would seem that the problem with some US banks is that they were not quite profitable enough.

Bashing executive pay is a politically useful way of giving some moral fibre to what is ultimately a Howard-esque way of buying support. Unfortunately for Australian banks, they have left themselves open to being used like this. There was a cute moment on The 7.30 Report on Monday night when the Chairman of the Australian Bankers’ Association said that ‘no Australian bank is having to be bailed out in terms of capital. We can all raise our own capitals fine.’ Maybe that’s what the banks are telling themselves. But as Rudd clearly explained in Parliament, the very reason that the government guaranteed deposits and backed Australian bank funding in the wholesale market is that they can’t raise their capital ‘fine’ if they are competing against banks backed by their own governments. By taking the Labor government’s shilling, the banks have conceded they need it and so have opened themselves up to moralising from Rudd.

Yet at the end of the day, after lauding how profitable Australian banks are, Rudd is still going to want them to stay that way and will be exposed to a charge of being ineffectual, or in their thrall, if he cannot follow his recent moralising through.

The root of Rudd’s dilemma is that these ‘obscene’ credit instruments, as he calls them are not the problem but a solution that no longer works. The problem is not too much credit but that the credit arrangements we have had for the last twenty years to keep the global economy going have broken down and need to be re-built back up. That is why governments around the world have been desperately doing so over the last few weeks. Rudd, and his moral counterpart in the US, Obama, may damn the evil of credit and praise the virtues of ‘living in your means’. Unfortunately the global economy is still at risk of finding out how wonderful such virtue is.

Posted by The Piping Shrike on Thursday, 16 October 2008.

Filed under Tactics



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