MB writes: The Search Foundation, working with Professor Frank Stilwell of Sydney University, has prepared a short statement on the global financial crisis and possible responses. The idea behind the statement is to stimulate thought about a progressive agenda among unions and progressive organisations, and the Foundation itself will be working on an agenda for concrete reform proposals directed at refocusing the economic debate on the “the core needs of working Australians”. I don’t necessarily endorse the whole of the statement, but I think it’s well worth posting here to stimulate debate.
The global financial crisis
The global financial crisis has dominated the headlines for months and has affected countries all around the world. Although national governments have stepped in to prevent the collapse of the financial system, the world is heading for a major recession. Australians nearing retirement have seen the value of their super fall dramatically while workers face the prospect of job losses and falling house prices as the financial crisis hits the rest of the economy. So, how did this happen and what can we do about it?
The most common reasons given for the current global financial crisis are:
1) US banks and mortgage brokers giving home loans to poor Americans who later defaulted on their debt;
2) the failure of the banks and investors to adequately assess the risk of investing in the financial assets that were based on these loans; and
3) these bad mortgages were sold to banks and investors around the world.
Although these factors are very important, there are deeper causes of the crisis. These include financial deregulation, and other ‘free-market’ policies, followed in Australia, and around the world, over the last three decades. Another factor is the over-consumption of people in rich countries on the back of a big increase in debt, and the exploitation of poor countries and the environment.
The economists, business lobby groups and politicians who pushed this ‘neo-liberal’ – or ‘economic rationalist’ – agenda argued that if governments ‘got out of the way’ and let the ‘free-market’ operate without interference, then we’d all be better off.
They called for ‘deregulation’, ‘privatisation’ and more ‘competition’. So, they removed protections for Australian industries, reduced regulation of banks and other finance companies, sold off public assets and attacked trade unions. They claimed that this would lead to a more efficient economy as well as higher economic growth.
The results have not lived up to the claims of those who pushed this agenda. Reducing regulation of banks has not led to more competition and a better deal for customers, but to fewer banks with bigger profits. It has also encouraged more financial speculation and less productive investment in the new infrastructure, social services and new industries we really need.
Removing protection for Australian industries and pursuing ‘free trade’ has not created new high-tech industries and quality jobs. Australians still pay far more for our imports and in interest payments on foreign debt than we receive for our exports. Rather than becoming a more diversified economy we have become even more dependent on mining and agriculture.
Privatisation has also reduced governments’ income without delivering the promised benefits to consumers. Governments and big business have also put a big effort into reducing the rights and conditions of Australian workers, most recently with the WorkChoices laws.
These policies have created more insecure jobs, greater inequality and lower rates of employment than during the 1950s and 1960s. Big corporations have earned massive profits while our healthcare, education, infrastructure and environment have been run down.
Financial deregulation led to both the ‘subprime crisis’ and the global financial crisis. In the US, badly regulated banks and mortgage brokers sold these ‘subprime’ loans to people with low incomes and poor credit histories. The loans were then packaged into derivatives that could be traded on markets. Private ratings agencies like Moody’s and Standard & Poor’s gave these financial assets high ratings and they were bought by banks and other investors all around the world.
When Americans started defaulting on their home loans in large numbers US house prices fell sharply. This caused the value of the financial assets based on these home loans to fall too, creating massive losses throughout the global financial system. These losses sent shockwaves of panic through global markets, made even worse by the complexity and lack of transparency of the financial system. Banks refused to lend to each other, huge companies went bust and governments around the world scrambled to stop the financial system from collapsing.
So, what should we do about it? The Rudd Government’s guarantee of all bank deposits, the cash payments targeted at low-income earners and his commitment to bring forward major infrastructure projects are welcome. However, it is clear that a lot more needs to be done to bring what the Prime Minister called ‘extreme capitalism’ under control. We need to think about how we can re-regulate the financial system to make sure it performs its proper role of financing productive investment and does not threaten the livelihoods of working Australians. To do this we need global cooperation, best achieved through the United Nations, to re-regulate global finance.
The free-market agenda of the last few decades has failed. The big financial firms failed to efficiently allocate financial resources and to adequately assess risk. When the financial sector imploded it fell to governments – and ultimately taxpayers – to bail out the banks and stop the whole system from collapsing.
What the current crisis makes clear is that the era of governments acting in the interests of big corporations and free-market economists must end. Australians must force their elected representatives to reject the failed policies of the last three decades and refocus on the basic needs of Australians. The need for a healthy environment, secure quality jobs and decent public health and education should be its top priorities.
This serious crisis is an opportunity for a shift in direction. Government has to lead now, and with popular support, it can make the urgent need to reduce greenhouse gas emissions the focus of its effort to protect jobs and rebuild our economy.
Wow, I am in total agreement with every word.
Well this just goes to show that once you teach a parrot to talk, it’ll just keep right on saying whatever you taught it to say in the first place.
“We need global cooperation, best achieved through the United Nations…”
Man, what do youse even need me for? This stuff writes itself.
Bailiff, tag this post and then get some Swiss mountaineers and Tibetan sherpas to place it atop the 40,000-foot summit of Exhibit Q, Leftists Have No Idea What They Sound Like To Sane People.
Oh God, we’re back to hackneyed taunts and alcohol induced puerility as a substitute for intelligent commentary.
Implication of that statement: a mining job is not a quality job, a farming job is not a quality job, a professional services job is not a quality job, but a manufacturing job underwritten by a tariff is a quality job. It’s a bizarre hang-up that thoughtful lefties everywhere have overcome.
As for the exploitation of poor countries, the expansion of global capitalism into relatively poor communities is probably the greatest force for good in this world. That anyone would use the current crisis in financial markets to push an anti-trade (and therefore, essentially, pro-poverty) agenda destined to benefit only politically-well-connected corporations and trade union officials is despicable. Predictable, but despicable. Again, the thoughtful lefties have dropped all this and are simply seeking equal treatment (see, for example, Oxfam’s brilliant campaign against the Common Agricultural Policy and for access to European markets for African farmers).
BBB
BBB is correct.
The Search Foundation has conflated two different problems and treated them as if they were the same.
The first problem is the appearance of asset bubbles within national economies. Most attention has ben paid to the US. But much the same thing happened in several European economies at the same time.
The second problem is how the dodgy paper that fuelled these bubbles was bought by different institutions and interests in every corner of the world. This aspect turned national bubbles into an international credit crunch.
Bubbles are a common feature of national economies. I fail to see how any UN-sponsored body can influence what happens in national economies.
Bubbles are fuelled by the cross-border transfer of funds. These arrangements are made between consenting adults. I fail to see how this transfer can be both regulated and made more “transparent”. That is a logical impossibility.
Likewise, the purchase of dodgy financial paper is a transaction between consenting adults, one of whom is an idiot. Does the Search Foundation propose to set up UN monitors to run a geiger counter over these transactions? How on earth would these monitors be in a better position to assess the soundness of this paper than the people who are taking the risk when buying it?
Maybe the Search Foundation’s proposal would make more sense if it were written in Esperanto.
I think I could probably scratch together a billion Chinese and a few hundred million Indians hauled out of poverty over the past couple of decades who might disagree on this point.
And how would the world be a better place if Australian
boutique workshopsfactories were still churning out Leyland P76’s and Camiras like they used to back in the days of protectionism?As for superannuation, even allowing for the current issues, if you look over a longer period than the last six months returns have been just fine.
I’m not arguing that our current system is perfect, by any means. But I don’t see how a wholesale return to the 1950s, which is what the post seems to be arguing for, is going to be an improvement.
Benedictus: “we’re back to hackneyed taunts…”
Hmm, have you noticed something about your turn of phrase? Could it be that it’s… a hackneyed taunt? Sign of a highly developed mind, I’m sure of it. Wow, we’re, like, in a hall of mirrors. Too many levels, man, it’s blowing my mind. But don’t mind me, babe, I’m like “high” on alcohol or something.
Okay, let’s settle on in and do some of that ‘intelligent commentary’ you’ve been craving, B.
“What is important is that we don’t make a futile attempt to prevent people from crossing borders. The moving of people will continue.” — Kofi Annan, de facto declaration of Third World demographic and economic war against developed societies, 2005.
“Family values don’t stop at the Rio Grande.” — George W. Bush, de facto declaration of intent to violate his sworn oath to uphold and execute the laws of his own nation; this wholesale dereliction of duty then being implemented through various sweeping executive orders and the studied lack of others, 2000 – 2008, continuous.
Why do you think that Moody’s and S and P, as well as countless investors and sellers of craptarded financial instruments, thought that the price of US real estate was destined to go forever upward, and that therefore mortgage-backed securities were a safe value? It’s because they could see with their own eyes that the mad stampede of immigration, which had caused the US population to swell by 100 million in roughly 30 years, was never going to be responsibly regulated by the nation’s political and economic elites. Therefore: not only would demand for housing continue to spike, but also demand for housing AWAY FROM THE UNWANTED IMMIGRANTS would also always spike. (There are complex corollaries to your anticipated objections, but I’ll wait to address them until after you’ve made a fool of yourself by showing that your distant, removed-from-the scene, ideologically driven speculations, which I can predict like tomorrow’s tides, illustrate your functional ignorance).
In the mid-decade the directors of Fannie Mae and Freddie Mac publicly declared that they were not in the business of checking the legal status of immigrant home-loan applicants. Coupled with the Bush administration’s public declarations of intent to defy the laws it was sworn to uphold, what sort of market signals do you think were sent to prospective buyers and lenders?
It’s important to note that cool sociological statistical summaries which indicate contradictory data do not refute what I’m saying, because what matters was not the numerical reality but what the market was led to believe. Like they say in Hollywood, the appearance IS the reality.
There’s much more to be said about this, but the take-home point is this…
Shorter Benedictus: I’m as blind as a fucking cave fish.
Have a nice day, and try not to hurt yourself with the blunt scissors.
It’s usually a good idea to let some fresh air into rooms long shuttered to the outside world so posting the workings of the gurus at the department of political economy at good old Sydney Uni is a worthwhile exercise .
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And why are they now the “Search” and not the Communist Party of Australia any more?
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Katz has addressed the impracticality of their suggestions about regulations being supervised by the UN – mind you that is a non democratic body but the allure of central control is just too much I guess.
Still the writers have managed to get through their bit without bringing Israel into the mess and as Frank is an academic who co-authors with Evan Jones that is real feat and a sure sign of maturity and intellectual growth .
Three suggeations.
1 Bad\n\\
short selling and derivatives.
Three suggestions.
1 Ban shortselling and derivatives.
2 Tax records in the public domain.
3 Relativity of wages, say a ratio of twenty-to-one.
Kohler has an absolute corker on CDOs and CDSs in Biz Spectator this morning: A tsunami of hope or terror?
Oh, and if anyone missed Crikey’s video of the day yesterday, this is unforgettable … especially if you enjoy seeing FoxNews commentators being exposed as dead, flat wrong: Peter Schiff Was Right
Disclaimer: I’m not endorsing Schiff’s Austrian Reaganomics views, but you can’t deny the fact the guy was spot on.
Robert, no doubt, millions upon millions and Chinese and Indians have had the opportunity to climb out of poverty in the last decade or so. But there is a reasonable question as to how sustainable it is – for a start there are already widespread factory closures and job losses across much of China due to the current economic crisis, and in the longer term, the environmental damage being caused by these factories may well end up costing so much that many of the gains are wiped out.
I don’t believe we need a return to protectionism, but I think there is a very strong argument for trying to price in some of the costs and risks of relying too heavily on Chinese-made imports.
One could have so much fun with the idiocy of this statement, but time is short, so let me just point and laugh at one little bit:
Free trade does not cause economies to become more diversified, silly. They become less so. That’s the whole point: to allow countries to specialise, and gain economies of scale, in the areas in which they have abundant factors of production.
The ‘Search Foundation’ guy who wrote this statement desperately needs to be sent on Remedial Economics 101. But perhaps he just can’t afford it? Right-wingers on LP: can we rustle up a bit of cash to send a poor, intellectually deprived ex-communist on a basic economics course?
We need to have pity for people like him.
Paulus, I’m not sure whether the author seriously believed that free trade should allow Australia’s economy to diversify, but it’s not entirely clear to me that the economic benefits of having an economy focus a very large fraction of its efforts on a few industries always fully offset the risks. To take the extreme case: let’s say maximum productive efficiency would be gained by having the entire Australian export industry geared towards mining iron ore. This might well give us maximum possible GDP growth for a period during which there was high demand for iron ore around the world – but should that demand collapse for any number of reasons, it’s hard to see how the result would be anything other than pretty awful. Now sure, such a scenario is purely hypothetical, but it would still seem that government policy with the intent of maintaining diversity in the export economy could perhaps be justified on the grounds of maintaining stability, even if that’s at the cost of maximum productive efficiency.
To be fair to Frank, I think that it’s appropriate to note that this statement was designed for a general audience and not to be a research paper. Having said that, however, I qualified my endorsement of it because I do think in many respects that while his work on inequality is excellent, the economic paradigm from which he’s coming is somewhat past its use by date. But there’s a lot in there – in terms of the values underpinning policy – that I would agree with, and I think some of this criticism from the usual pro-market suspects is just quibbling – for instance, I don’t think it’s implied that the UN in its current form would be the responsible body for regulation, but I do think that it’s important that international economic policy be subject to some type of democratic control as opposed to being left in the hands of technocrats and the institutions which currently determine it – whose governance is highly skewed.
And, just by way of example, on mining as a source of quality jobs, the mining sector as at June 2007 employed 117,500 people. Compare that to the much derided manufacturing industry which employed 1,014,080 people at the same time.
http://www.abs.gov.au/ausstats/abs@.nsf/Products/444237E63B2A6BB9CA25748D0012E3EF?opendocument
http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/A7F761E9639C99E7CA2574B00011F49C?opendocument
wizofaus is also quite correct about the current job losses and labour unrest in China, and in fact the Chinese regime’s concern about resulting “social instability” explains their announcement of a stimulus package as much as macro-economic factors. In terms of the free trade/povery debate generally, people might like to examine statistics on the relative share of world GDP, income as between the developed and developing world and its change (or lack thereof) over the past few decades. I don’t have time to retrieve them now, but you may find yourself surprised.
Katz notes:
“Likewise, the purchase of dodgy financial paper is a transaction between consenting adults, one of whom is an idiot…”
And the other of whom is a crook.
UN involvement or no, it’s the crook I want to see behind bars and the de-regulated system that enabled him to flog this sort of snake-oil on an immense scale, re-regulated to prevent it happening again.
We already have national laws designed to prevent consumer and commercial fraud. What’s the problem with international ones?
Only in a small number of cases. The worst that can be said of most of the purveyors of this paper is that they were neglectful.
The people who bought this paper were usually in a position to know exactly what they were buying. No one twisted their arms up their backs and forced them to sign on the dotted line.
I have great respect for the UN, but it is bizarre to pin one’s hopes for the future financial stability in the world on the ability of that august institution to declare whether or not some abstruse financial instrument or other represents fair market value.
Regarding crooks, and the depths of deception all financial institutions indulged in to flog this toxic crap to naive and unsuspecting “investors”: PLEASE READ THIS PIECE FROM KOHLER ON CDOs.
Is that loud enough?
Mark: I think the ends sought by myself and the original poster are not too dissimilar, but I suppose I’m pretty unconvinced by the means.
Furthermore, I found the specific examples unconvincing; superannuation may have gone down, but over time it’s gone up a lot further than it’s gone down.
As to manufacturing, I accept we disagree on this topic. However, the majority of Australia’s manufacturing industry operates without government protection. So the majority of our manufacturing industry (and those one million jobs) have little to fear from “free trade”, because they are already fully exposed to it.
“However, the majority of Australia’s manufacturing industry operates without government protection”
I would be curious to see an estimate of just how many jobs manufacturing as a whole could sustain in Australia if there were no tariffs or government assistance at all.
Rob, I’m not arguing for protectionism. But I would like to point out that the realities of trade are much more complex than the “free trade v. protection” dichotomy captures. As are those of industry policy.
Katz, I don’t think anyone sensible is suggesting that the UN security council or general assembly would be voting on the permissibility or value of particular financial instruments. The IMF has a governance structure analogous to the security council – in that it represents states but empowers and weights their votes differently (with a massive advantage to the US) and it’s one of the entities being discussed in terms of global financial regulation. There is no doubt that it is being contemplated that decisions about the licitness of particular financial instruments are being contemplated in the discussions going on at the moment. The key point here is that such discussions and such a regulatory framework ought to be open to democratic input and to a degree, control (and here the obvious parallel is that in a nation state between ministers and technocrats). I don’t see any prima facie objection to such a function occurring within an agency under the auspices of a reformed UN. That’s the sort of medium term goal, imho, we should be discussing and working towards.
Um, pretty much the number of jobs we have now, wisofaus.
Tariff barriers (nominal rates of assistance) on manufacturing are close to zero in this country, and there isn’t that much government assistance either — apart from the car industry, which needs support in order to churn out big, inefficient sedans that no one wants to buy.
Paulus, there’s very considerable support given to manufacturing industry outside the auto sector and outside tarriffs. It’s often discussed under the rubric of “business welfare”.
…just like the $245 Brumby is apparently now generously donating to various businesses around the State.
Personally, I don’t have a huge issue with sensible government assistance to help Australian manufacturers remain/become internationally competitive – especially if the alternative is job losses and hence extra dole payments which would potentially cost a good deal more. Unfortunately I’m not often overwhelmed by how “sensible” certain forms of asssistance seem to be. But if it really is the case that there’s no evidence government assistance contributes towards job creation, then there doesn’t seem much reason for it.
Every law creates a multiplicity of loopholes.
The troublesome instruments that are iconic of the present crisis were originally traded domestically inside the US.
Would your contemplated institution oversee domestic financial transactions? Few countries would be happy with that form of oversight, especially the US. That recalcitrance would be a deal-breaker.
I haven’t fully thought it through, Katz, but there is no doubt whatsoever that among the plans currently under consideration – for instance that which Gordon Brown is proposing – is a measure to restrict the range of financial instruments that can be created and traded, and a body to monitor attempts to work around such prohibitions. This isn’t something I’m cooking up in a blog comment, but a serious proposal from the UK Prime Minister – and it’s supported by economists like Krugman and Stiglitz, if memory serves, among others.
Mark wrote:
Yairs. In the old days, we called them “exchanges” and “contracts”. Be nice to return to that eventually.
I think they’re proposing something akin to a Futures type market for complex derivatives (which implies both standardised contracts and players having to maintain a margin account at the clearing houses for which the house calculates the appropriate level, not the customer). It’s going to be a very tough road to negotiate that, but the entire financial community is comfortable in the way futures exchanges work.
There’s no reason why paper representing securitised mortgage risk couldn’t be traded on current futures and options markets. In fact present-day CDOs could be raded under some kind of clearing house arrangement. There is nothing bizarre or objectionable about such arrangements.
It makes one wonder why these markets didn’t evove during the recent bubble.
Probably, the bubble was so sudden and the appetite for this paper was so voracious there was no incentive to create a clearing house scheme.
Once bitten, twice shy.
Katz wrote:
The big historical futures markets didn’t emerge clearing houses until after a crisis either Katz – it’s just the name of the game. Granted, it’s a stupid game with plenty of historical examples of exactly why clearing houses emerged in the commodities futures markets (see wiki on CBOT – nice example of why credit default risk necessitates a central place of exchange whether government sponsored or not.
If life can be breathed back into the Doha round of trade negotiations leading to more reductions in trade barriers (in particular more access for developing world exports into developed economies and lowering of protectionist policies (Yes! Europe I am looking at you!) then something good will have come of the Credit Crisis. Even more so if it demonstrates just how wrong the Search Foundation Statement is.
I think I have to take issue with the amount of micro analysis being used to critique the Search Foundations post.
If we are not now reliant on mining and resource exports, can you point to anything else that is supporting our economy at present?
I have to agree that the ideology that has underpinned the issues that led to the financial crisis is wrong. Poor people were exploited in these so called subprime deals, I dont particularly care what happens to the greedy fools who traded on thier poverty, I hope they are held to account or perhaps experience some of the life they have now made much worse for many poor US workers.
I think the world is moving further away from the democratic ideals that have underpinned our society for a century, we need more control of money, corporations and powerful and wealthy individuals by the vast majority of people who are not in that group. To say that some in the developing world have benefited is to ignore the millions more who will live and die in abject poverty and the profiteering that is going on by arms dealers and finacial traders supporting regimes and insurgencies who have driven half the developing world into war and terror.
The fundamental issue is who gets to decide? Big Business and the powerful or us. I vote for us, call me a communist, or a loony lefty but seriously if you have accepted that the system we have now is the best we can aspire to, I emphatically disagree.
Maggie, Funnily enough, most people would agree with your aspirations for a better world. Unfortunately history and human nature aren’t on your side. Democracy and capitalism aren’t perfect systems, but they are the best we have come up with so far. Show me better systems and I’m in like Flynn. We’ve been through financial crisis’ in the past and we will go through them again. And, just as with this one and past ones that have all signalled “the end of global capitalism as we know it”, so will the future ones be deemed “the end” as well.
What needs to happen is learn from the mistakes without throwing the baby out with the bath water, stabilise the financial system (again), write off the bad debt, prime the pumps, restore confidence and in a few years time this will be another down on the rollercoaster that are the markets.
It is clear from the responses here that some forms of protectionism are supported in a free market. So what makes one form of protectionism bad and another good?
I would prefer to see protectionism directed towards companies that pay tax in Australia. Keep the money here. Govt funding should be withdrawn for any companies who do not pay tax in Australia, or outsource labour offshore.
BTW Carbonsinks link is very interesting.
I would say that the free market operating without regulation, restraint or social conscience should be considered ‘past it’s useby date’ too Mark.
wizofaus: I think John Brumby’s move is to purchase services fron local suppliers, a subsidy (perhaps) not a gift.
Maggie: some posters here claimed that abject poverty had been REDUCED by trade, not that it had been abolished. Do you agree that living standards have risen, on average, in China and India? I won’t call you a communist just because you think the present set-up needs big improvements. You’re not advocating the old Soviet, Cuban, Khmer Rouge, etc “systems” are you?