Friday, 10 April 2009
Honoured guests, honoured friends, people of good heart, good mind and good conscience gathered here at St Paul’s, it is fitting that we gather today in this great cathedral to reflect together on the great events of our time.
K Rudd St Paul’s Cathedral, 31 March 2009
When Rudd stood up at St Paul’s Cathedral to deliver his sermon strategy for economic recovery, he was giving probably one of the most coherent political responses to the economic crisis from any western leader – and it is a moral one.
To make a morality play out of this economic crisis it is first necessary to make it a financial one. Rudd’s speech shows how the idea that this is at heart a financial crisis is riddled throughout economic discussion nowadays. When Rudd talks about the unfettered free markets that became “worshipped as a god” and must now be regulated, he isn’t talking about the used car market or the world market for steel, he is talking about the financial markets. When he talks about “extreme capitalism and excessive greed” he is not talking about the vast fortunes amassed in mining or property, or even the inherited fortune of James Packer, he is talking about the financial industry. As Rudd summed up the prevailing view of where the blame lies, in his Monthly essay, the financial crisis has “become one of the greatest assaults on global economic stability to have occurred in three-quarters of a century.”
Nor is this confined to the left. The right may be more defensive about it, but they have totally accepted the terms of the debate, with even free-market supremos like Costello telling anyone who’ll listen how it was he who regulated the banks after the Asian crisis etc.etc. The only real difference between left and right is where in the financial system they think the evil lies, for the left it is in Wall Street under Bush, for the right it was on Main Street with the lending to the Great sub-prime Unwashed under Clinton.
It may appear that the downturn was caused by the financial system as it started with the failure of the sub-prime housing market in the US and the collapse of the world’s largest mortgage lender, Fannie Mae, before spreading to the meltdown in Wall Street and now hitting the ‘real’ economy – but it doesn’t explain it. The reason why the financial meltdown has been so devastating, is that the global economy was so reliant on it. This was less the financial system “assaulting” economic stability but no longer able to prop it up against the distortions caused by the increasing uncompetitiveness of the developed economies, especially the US, against the new emerging ones.
Take probably the clearest example of the US’s structural weakness against the emerging industrial nations, the US auto industry, a critical industry for any major industrial power. Does anyone seriously believe the problems of the US auto industry stem from Wall Street rather than the auto industry itself? The crisis in the US auto industry may have only become apparent after the financial meltdown, but it was hardly caused by it. Instead the relationship is the other way round, it was Wall Street so hated by the left, and middle income credit so hated by the right, that enabled the auto industry to be financed at the corporate level and sell their goods at the showroom. The removal of that prop meant the industry had to go to the only one left, in Washington.
The trouble was that for the political class in Washington it was a bit harder to moralise about the problems of the US car industry than it was for the financial industry. It might be feasible for politicians to have a go at claiming that the massive pay-out to Lehman’s CEO was somehow a driver of the bank taking risks that led to its collapse. But it is a bit harder to do the same for GM. The huge salaries of the auto industry’s CEOs may look out of line with its poor profitability, but they hardly caused it. Senior management in Detroit could be paid nothing and the car industry would still be in a mess.
Not only does moralising about the financial system do nothing to solve the problems of the ‘real’ economy, without doing so, it doesn’t even get the right result in the financial system itself. Getting the banks recapitalised to start lending again has been identified as one of the most important government priorities, but as shown by the non-result in London last week there is still little progress. But the real problem is probably clearest in Australia where the banks’ capital position is strong. Turnbull’s constant refrain since the government supported the banks’ capital position by guaranteeing their capital raising, is that the banks still aren’t lending to business. Here’s an insight. It’s because they don’t think it’s profitable to so.
By focussing almost wholly on the financial system rather than the real economic problem, both sides of the political class end up contradicting themselves. On the one the hand they castigate the financial system for taking risks, on the other they demand it take even more risks by lending to business at a time when profitability is going south. Making a moral case out of the financial system may not make much economic sense nor do much to address the economic crisis. But it does help alleviate the political crisis, and give the politicians something more to do than join the Deputy Prime Minster on Jobless Watch.
Posted by The Piping Shrike on Friday, 10 April 2009.Filed under Key posts, Tactics