Letter From Australia (About a Ruinous Government)

Cleaning Up The Unlucky Country

In hindsight it will likely be told that Australia, of all the developed countries, handled the Global Financial Crisis (GFC”) the worst–and that, dear friends, from a country which went into the crisis positioned far better than most.  What caused the manufacture of such a crisis?

• A grandiose Prime Minister who cast himself in a Churchillian role
• An insecure Prime Minister who wanted to be seen as the Barack Obama of the Asia-Pacific Region
• An economically ignorant Prime Minister who thought that money could be borrowed ad infinitum.

The name of the one who is arguably Australia’s worst Prime Minister?  Kevin Rudd.

Paul Sheehan, Sydney Morning Herald correspondent, fills in the details.

Unusually, history offers a precise time and place, right down to the day, to appreciate why Australia has gone, seemingly suddenly, from a land of boom to a nation facing an austerity budget with sacrifices expected of all. The date was February 4, 2009.

On that day, for the first time in the 15 months since the Howard government had been defeated, a spontaneous upsurge of genuine unity, concern and outrage came from the opposition. It crossed all factions and cliques. It fused Liberals and Nationals.  The cause of their collective alarm was the size and scale, and haste and dubious design, of six appropriations bills that Kevin Rudd’s government was about to ram through Parliament. These bills would transform the budget.

The catalyst for this was the 2008 financial crisis that had thrown the United States and western Europe into recession and come close to fusing their banking systems. The crisis had not, however, affected Canada or most of Asia. It was countries running big government debt and deficits that were in crisis control.

At the beginning of the GFC, Australian banks were rated the best and strongest in the world; the government was running a fiscal surplus and had done for years; mining and its downstream industries were booming due to strong demand from the developing world.  But either Rudd panicked, or his vaunting ambition saw an opportunity to paint his inflated ego into history’s portrait gallery, or he was just plain economically ignorant. 

Rudd said Australia needed decisive action to avoid a recession. When the opposition caught a glimpse of what he intended it saw immediately that Rudd’s grandiosity was dangerously at work. We are now discovering in great detail, via the Royal Commission into the Home Insulation Scheme, the extent of dysfunction of Rudd’s management vision.

Joe Hockey, who was about to become shadow treasurer, opened the attack on February 4. “We have not seen the six bills that are going to be introduced, debated and voted on in this place today,” he said. “These six bills will take us into $100 billion of debt.”

Malcolm Turnbull, then opposition leader, followed soon after. “In four years, net debt will be $70 billion … and the government has asked for the right, just a moment ago, to borrow up to $200 billion, or $9500 for every man, woman and child in Australia,” he said.  “The plan reeks of nothing more than panic … We do not reject the need for a stimulus at this time. Our judgment is that $42 billion is more than is appropriate right now. The government is looking increasingly like a frightened soldier who fires off all his ammunition in a panic in the first minutes of an engagement … Our judgment is that a more appropriate level of stimulus is in order, 1 to 2 per cent of GDP, or between $15 billion and $20 billion.”

All night, Coalition members, 57 in the House and Senate, rose to speak. Former treasurer Peter Costello, silent on the back bench for a year, was moved to genuine outrage.  “When you inherit an economy which has a budget in surplus and no net debt, which has unemployment at 30-year lows, where the credit rating has been restored to a AAA rating on foreign currency bonds, where you have a Future Fund of $61 billion and a Higher Education Endowment Fund, when you inherit an economy in that condition you have to find a fault somewhere,” he said. “If you cannot find a fault somewhere, what problem have you got to solve? So the Labor Party, naturally enough, looked for a problem. The trouble is, it was the wrong one.”

The problem lay with a minor matter called government debt.  Borrow in haste, repent in leisure.  It will take decades for the fiscal damage done by Rudd to be repaired–and it will inflict pain upon at least two generations of Australians.  Or, they will cave, and kick the can down the road for their grandchildren to face up to. 

When debate was finally guillotined it was 4.45am. For the opposition it was a new dawn. It did not need to wait for opinion polls or focus groups. Typical was this from former minister Bruce Billson. “The Coalition is seeking to ensure that the nation does not sleepwalk into a poorly designed, irresponsible and unsustainable package dreamt up by a panicked government,” he said. “The only certain outcome of this package is waking up to the nightmare of decades of excessive debt and deficit.”

That is exactly what happened. Rudd was worse than Whitlam. In the six years Labor was in government, the growth in Australia’s real federal expenditure was close to highest in the Organisation of Economic Co-Operation and Development – even though Australia was a resource economy with a sturdy banking sector and no housing bubble, and thus not susceptible to the financial shock in the US and much of Europe.

It is difficult to move the macro-economic needle quickly in a $1.5 trillion economy that is the 12th largest in the world (larger than Spain, which has 47 million people). In 2009, Rudd managed to jolt the needle, ramping up federal spending as a percentage of GDP.

He was also more profligate than Julia Gillard and she was no prize, loading future budgets with the Gonski education program, the national disability insurance scheme and the multibillion asylum seeker debacle without seeming to have a Gonski about how it would all be paid for.

Now that the bills are coming due, neither Rudd nor Gillard are around. It is the morning after. The clean-up. The payment due date. And the demographic challenge has loomed into focus. So let’s not confuse who did the spending and who is having to pay. . . .

A clean-up is not a crisis. We’ve already had a false crisis and are about to pay for it.

Letter From the UK (To British Expats in Europe)

Ukip urges Brits to withdraw their money from Spanish banks

Nigel Farage has urged British expatriates in Spain to pull their money out of the country’s banks. 

By Robert Watts, Deputy Political Editor

4:57PM GMT 23 Mar 201
The Telegraph

The UK Independence Party leader said that the European Union had “crossed a line” by trying to extract funds from savers under the terms of the abandoned Cypriot bail-out.Mr Farage said: “Even I didn’t think that they would stoop to actually stealing money from people’s bank accounts.

“There is going to be a big flight of money and that flight of money won’t just be from Cyprus, it will be from the other eurozone countries, too. There are 750,000 British people who own properties, or who live, many of them in retirement, down in Spain.  Now that we see the EU are prepared to resort to anything to keep alive their failing euro project, our advice to expats living down in the Mediterranean must be, ‘Get your money out of there while you’ve still got a chance’.”

Mr Farage urged George Osborne, the Chancellor, to rule out any such levy on British savers.

In a wide-ranging speech yesterday, Mr Farage also said that no immigrant should be able to claim benefits until they have lived, obeyed the law, worked and paid taxes in the UK for five years.He also said that Ukip would not form a pact with the Conservative Party under Mr Cameron’s leadership.

Mr Farage added that his party was drawing in support from all voters, not just Conservative supporters.
“Please don’t just think that it is just tired Conservatives that are coming to Ukip,” he said.  Ukip has enjoyed a surge in popularity after coming second in the Eastleigh by-election ahead of the Conservative Party.

He admitted that some of the party’s new voters were eager to “stick two fingers up to the establishment”. But he added that a vote for Ukip is “far more powerful than a protest vote”.  Mr Farage insisted his party could win votes from across the political spectrum as their success in Eastleigh had been about more than protest votes. He added there has been a “wholesale rejection of the career political class”.

Modern Secular Capitalism

A Diet of Darwinian Dogs

All human actions are grounded in ethics, one way or the other.  There is no such thing as an amoral act or deed.  Christianity declares to the world the doctrine of the ubiquity of ethics.  This is a message that does not sit well with Unbelief.  Ever since the Fall men have been trying to wriggle out of being pinned to the wall and having to account by spiting out all the butt ends of their days and ways. 

One stratagem has been to claim vast realms of amorality where ethics and morality are deemed not to apply. But the Word of God is unequivocal: all things lie bare and exposed before the eyes of Him with Whom we have to deal (Hebrews 4:13).  What is done in the darkness will be proclaimed in the light.  Unbelief recoils at these truths.  It would assert that there are enormous swathes of human action which are so unimportant that they are sub-ethical.  It would claim, on  the other hand, that some things are so vast and big that “ordinary” ethics do not apply.  And when it comes to oneself, Unbelief asserts a host of mitigating circumstances and rationalisations to explain away any wrong doing, whilst deflecting blame on to others, or to circumstances. 

The dismal science of macro-economics is one example of a “big area” deemed too important to be subject to ethics.
  Yet most of the economic problems with which Western nations are now confronted exist because governments and market participants have refused to acknowledge the relevance and reign of ethics.  The “solutions” to our problems are similarly devoid of any hint of repentance, or admissions of guilt.  There is a slew of blameshifting, but not confession.  The solutions will likewise fail.  God is not mocked. 

Here are just a few examples.  If a lending institution (a bank or mortgage company) lent to a borrower who could not possibly service the loan, let alone repay the principle, the transaction would be irresponsible, reckless, and unethical.  It would be morally wrong.  Such deals were done, of course, with the implicit, and often explicit, promise that perpetual, relentless capital gains of housing would “make everything right”.  It was a form of fraud and deceit.  “Informed consent” is a meaningless concept in such transactions.  One appropriate consequence of such immoral behaviour might be for the courts to order such loans to be written off in total, with no recourse to the security of the borrower’s property. 

Secondly, the Bible’s social ethical frame presumes an imbalance of power between a lender and a borrower, such that failure of the borrower to service or repay a loan should result in a legal bias in favour of the indebted.  The powerful have a duty of care.  It is not just the amoral dog eat dog “ethic” of social Darwinism which Unbelief propounds.

Thirdly, institutions which should have known better and which should have had adequate capital reserves to more than cover extreme contingencies such as occurred in 2008-11, must be held accountable morally, civilly, and criminally.  They must face the consequences of their recklessness–liquidation, prosecution, takeover, and so forth.  If a seller of securities fails to have sufficient capital to meet its obligations, it is trading in a manner that is implicitly fraudulent, technically insolvent.  Directors of ordinary companies can go to prison for such recklessness and fraud.  Investment banks want to be put into a different category of accountability from traditional banks, suggesting that normal ethical and legal principles don’t apply to them. 

Fourthly, if governments and government agencies act in a manner which convey implicit guarantees, leading to foolish behaviour on the part of non-government actors, with the presumed cloak of low-risk government security, both politicians and government officials ought to be held criminally liable.  If politicians, for example, push lending institutions into high risk, low security house lending to minority groups or low-social economic constituencies in the interests of “fairness” and “non-discrimination” (as they did) such politicians and complicit government agencies should be criminally liable for charges of  bribery and corruption. 

These infractions largely remain untouched.  Saving the system and making it solvent again have become the prime focus.  Consequently, crises will recur.  Amoral Darwinian capitalism is doomed to destruction and collapse.  Take away the moral foundations of an economic transaction and fiduciary care evaporates.  Reckless greed and irrational panic mushroom forth.  Dogs eat dogs.    

God requires doing what is right, before personal gain.  Any economic system not built upon such His transcendent ethical requirements will fail, modern Western capitalism most definitely notwithstanding. 

Avoiding the Inevitable

Not a Pretty Sight

Only a fool tries to avoid the truly inevitable.  A wise man will face up sharply.  In our days we are governed by men who are fools.  They are trying desperately to avoid the inevitable.  Their one excuse is that the voters want them to.  They know full well that if they faced up to the real economic situation facing New Zealand and the rest of the developed world there would be riots in the streets and they would be voted out at the first opportunity.

Their approach, therefore, has been to practise the equivalent of palliative care.  Maintain huge deficit spending increases, trim back at the edges, sell a few assets so we can temporarily pay off a bit of debt, make the patient feel as comfortable as possible, and wait.  Hope for a recovery that will allow us to trade our way out of the recession, thereby avoiding a genuine depression.  Kick the toxic can down the road for our children and grandchildren to deal with.

The Governor of the Reserve Bank, Dr Alan Bollard sounded almost plaintive yesterday as he lamented the parlous state of affairs.

New Zealand’s debt and asset price boom is acting as a big drag on the economy, and house prices still look “overvalued and expensive”, according to Reserve Bank governor Alan Bollard. And New Zealand may be dealing with the aftermath of the large increase in private debt for “quite some time” yet, he says.

The Minister of Finance, Bill English recently warned that New Zealand may well limp along for another fifteen years, telling us that things were really bad “out there”.  This is inevitably what happens when debts are excessive and palliative care is the policy.  Palliation locks in a long, lingering recession.  Blame a generation of voters and politicians brought up on a diet of demand rights and redistribution.  It prevents both governments taking and voters allowing the requisite painful medicine.

“It looks as if the accumulated debt is acting as quite a sustained drag in New Zealand and other advanced economies,” Bollard said in a speech in Auckland yesterday, pointing to a still “tepid recovery”. Per capita GDP was still 3 per cent below its peak reached almost five years ago.

Five years on from the start of the global financial crisis “the picture is far from clear”. The persistently tepid recoveries across advanced economies, including New Zealand, remained a surprise, he said. The run-up in debt and the disappointed expectations of borrowers who paid high prices for assets were “clearly playing some role in low rate of growth of productivity and GDP”, he said. Two years ago the Reserve Bank had expected the official cash rate to be back up to 5.75 per cent by now, but it remains at just 2.5 per cent, and some believe it may need to be cut because of global risks.

The problem is the cleft stick upon which Bollard is hoist.  One fork is excessive debt which makes recovery slow and tepid and painful.  The other fork is the Reserve Bank’s policy of very low interest rates (to try to stimulate economic growth).  The risk is this: it will not take much for housing-besotted New Zealanders to decide the way ahead is to lever up even more to use appreciating real estate to pay off their debt hangover.  The adage is: you have to spend money to make it.”  Take on more debt to pay existing debts down.  The conduit will most likely be a debt fuelled, demand driven housing market bubble.

When New Zealand made its Reserve Bank independent in the 1980’s its sole concentrated focus was to drive inflation out of the economy.  The RB reasoned at the time that inflation expectations were more critical than actual inflation.  Until people stopped buying, selling, and borrowing with an expectation of forthcoming inflation, the economy would remain overheated with persistent inflationary pressures.

In New Zealand there is an almost universal expectation that residential house prices always rise.  They may stay level for a time, but they will bound ahead.  The palliation policy has reinforced that expectation, not crushed it.  Palliation is feeding future inflation expectations; residential housing will be the bubble of popular choice–as it always has been.  Bollard, again:

But crucially in New Zealand house prices had not come down “very much or for very long”, unlike in the United States, Spain or Ireland. The median household wealth in the US fell about 40 per cent in the three years to 2010, mostly from falling house prices. House prices in the US had not risen as much as they did in New Zealand.  Bollard said that “our sense is that real house prices are still somewhat overvalued: They are certainly well above historical levels and look expensive by international standards, relative to incomes or rents.”

With a huge debt hangover and a tepid productive economy it is only a matter of time before Kiwis start to reason, “Let’s buy and sell a few houses to reduce our debt and get ahead.”  All that cheap money has to go somewhere, and it ain’t going into the productive sector.  Auckland house prices are already starting to ratchet up.  Early signs of fever can be seen. Housing inflation expectations have not abated.

That’s the problem with trying to avoid the inevitable.  Better to force de-leveraging now by putting up interest rates–before it’s too late.  Sure it will mean lots of economic pain and suffering for three to four years.  But that’s a place that neither voters, nor politicians, nor the Governor of the Reserve Bank want to go.  Palliative care it will be–plus a long, lingering recession in the productive sector, coupled with a residential housing boom and a fresh debt-fuelled bubble.  Not a pretty sight.

But New Zealanders still prefer this course of action.  Things will need to get a whole lot worse before we are prepared to face up to the depression we have to have.  It’s not an easy pill to swallow for those who believe that the government’s fundamental responsibility is to expropriate people’s property to take care of “Me”.

Institutional Blinkers

Purblind Central Bankers

The causes of the Global Financial Crisis are complex and multi-valent–as expected.  One individual who shares a good deal of the blame, however, is Alan Greenspan, former chairman of the US Federal Reserve.  Greenspan deliberately kept interest rates low in the US (and thereby in much of the world) during the critical period of 2000 to 2004.  It was during this period that house prices began to inflate rapidly.

In May 2000 the US federal funds rate (set by the Federal Reserve) was 6.5 percent.  Then the dot-com crash happened.  Internet and IT companies had been a hot item on the stock market, trading well above their intrinsic value.  Suddenly, as is often the case, the mood of the market changed:

The Second Global Financial Crisis, Part III

Nursing our Malice

When the Global Financial Crisis hit many pundits argued that Western capitalism had failed.  They had a point.  Half a point.  Capitalism is essentially the private ( as opposed to government) manufacture and trading of goods and services.  But such a non-government, free trade system cannot survive unless it is built upon a foundation of integrity, honesty, and the prevention and punishment of theft. Capitalism only prospers and benefits the majority if it cares deeply about the sovereignty of other people’s property, believing that what God has given, let not man take away.

The Second Global Financial Crisis, Part II

Meeting Obligations, Or Not

In a previous post we argued that little of any significance has been accomplished effectively to regulate investment banking.  There is no doubt whatsoever that global investment banking, which had been dominated by US companies, had been responsible for the Global Financial Crisis.  As a result of government actions, risk is now concentrated in that sector more than ever before.  If institutions then were too big to fail, there are bigger now investment banks.  Moreover there are less of them.  Risk is therefore exacerbated and arguably more acute than 2008.

Why do size and number of investment banks matter?

The Second Global Financial Crisis, Part I

Defalcation on a Unimaginable Scale 

We are nearly four years on from the Global Financial Crisis.  It has achieved the status of its own acronym (GFC)–a sure sign in modern parlance that it “means something”.  Its effects are still with us and some assert they will ripple out for a further decade. Has the problem been solved?  Far from it.

In short the regulatory changes made, particularly in the United States, have been both inadequate and even those passed, ineffectually policed.  The causes of the original crisis were manifold; the solutions, however, appear straightforward.  They have largely been ignored.