In the current election campaign, the central argument of the conservative parties is that Labor has mismanaged the economy since coming to power in 2007, spending like a drunken sailor and running up unsustainable debt.

The standard attack line from the Coalition is that Labor is borrowing $100 million a day to service our debt and fund their reckless spending. Furthermore this unrestrained government largesse is said to be crowding out private investment and putting unnecessary pressure on interest rates.

But as with so many things that come out of the mouths of politicians, the Coalition is bending the truth to make a political point. The shame is the media, either out of laziness or ignorance, routinely lets them get away with it.

Firstly, when the Coalition talks about borrowing $100 million a day, it is talking about “gross” debt. This is like comparing people’s mortgages without making referencing to their ability to service those debts – their salaries, rents and other income-generating assets. What matters to financial markets is the “net” debt position, which is calculated after subtracting financial assets such as cash on deposit, foreign exchange and gold reserves. This is the most useful measure for international comparison.

Australia’s net public sector debt in 2010-11 is projected by Treasury to be around $78.5 billion or about 8 per cent of GDP. This compares with 58 per cent of GDP in the USA, 61 per cent in the UK, 64 per cent in Germany and 111 per cent in Japan. Australia is ranked by the CIA at 108th position in the world in terms of public indebtedness, just ahead of China. Moreover, our net debt is projected to contract to 5.5 per cent of GDP within two years.

Secondly, even if we are to insist on using gross debt as the measure, Australia’s public debt position compares extremely favourably with other major economies. According to the OECD, Australia’s gross financial liabilities this year will total just over 19 per cent of GDP. That puts Australia in second position behind Luxembourg in the ranks of of the most fiscally sound countries in the developed world.

Now, this gross debt is overwhelmingly made up of the Commonwealth Government Securities issued by Treasury. What people may not appreciate is that as Australia is a rare ‘AAA’-rated sovereign borrower, its paper is highly sought after on global bond markets. This is particularly the case when sovereign wealth funds are so shy of equity markets and when asset managers are favouring more conservative investments.

If anything, the bond markets grow nervous when the Commonwealth starts running down its gross bond issuance. That is because there isn’t enough paper of this quality to invest in. Without a government bond market, there is no reference point for borrowing.

Thirdly, the Coalition insists that increasing public debt puts up interest rates. This seems hard to fathom when the US government, one of the world’s most indebted sovereigns in absolute and proportional terms, is issuing two-year bonds with a yield of 0.55 per cent, a record low and 10-year bonds at less than 3 per cent. If debt is such an issue for financial markets, surely market interest rates should be heading higher?

Fourthly, the notion that the government is “crowding out” small business borrowers by issuing debt is ridiculous. The government, like our banks, borrows on global capital markets. Its call on those markets in proportionate terms is akin to the pimple on the nose of an undersized gnat.

To give readers an indication of the size of the bond market, data from the Bank for International Settlements shows the international debt securities by all issuers totalled $24.2 trillion in March this year. Of that, Australian issuers accounted for $561 billion. The overwhelming majority of that was from Australian banks ($518 billion). Australian corporate issues totalled $26.5 billion and the Australian government $16.9 billion.

In other words, Australia’s biggest borrowers are our banks. And those banks borrow in global capital markets to fund Australian home, consumer and business loans. Borrowing by our banks accounts for 92 per cent of Australian debt issued abroad. The government is the smallest borrower, accounting for 3 per cent of debt. There goes the “crowding out” argument.

Fifthly, claims about government debt make no sense unless one looks at the reason for that debt. Every economy in the developed world is currently running a deficit. The overwhelming cause of that is the biggest and deepest global recession since the 1930s. If Australia was to be running a surplus at this time, as the Coalition suggested, tens of thousands of Australians would now be out of work and our fiscal position arguably would be even worse as the government would be losing income taxes and paying more out in transfer payments to the unemployed.

Finally on interest rates, the election perennial, there is no credible market economist who believes interest rates are more likely to be higher or lower under one political party or another. Treasury knows this, the Reserve Bank knows this. Everyone knows it but Joe Hockey and the economic illiterates who claim to be the better economic managers.

The fact is Australian cash rates now are back to their long-term average level of around 5 per cent. They are significantly higher than the near zero interest rates of Japan, the US and Europe, but that is precisely because our economy is much stronger and theirs are basket cases. Would you rather have zero interest rates and no job??

So in this election campaign, can my former colleagues in the media do the public they purport to represent the justice of challenging politicians on the facts when it comes to economic policy?

He didn’t explicitly refer to a Tobin Tax, but I suspect that’s what he had in mind, and it’s something that has popped up higher on the agenda over 2008 and 2009. So it’s worthwhile to point to a comprehensive article by John Langmore in Inside Story on just that measure.

From my point of view, one key advantage of a tax on cross border financial transactions would be its contribution to transparency and thus the ability of states (and others) more easily to grasp what’s occurring in the ‘shadow banking’ sector. Whether or not future bank bailouts are politically feasible is another question entirely. I suspect that might be political suicide in the USA, no matter how dire another financial shock.

And, incidentally, when the Democrats inevitably lose Senate seats in November, it will become more or less impossible for anything of any size to pass the US Congress.

No doubt, as with most of the measures taken to increase competition in the interests of consumers and citizens, the usual suspects will find some reason to decry “government interference” or whatever. Such are the contradictions of neo-liberalism. The ideological patter is all too often a screen for a sort of dirigisme that supports the interests of big business above all others. We’ll see – surely no one could object to these important matters being canvassed in an informed and wide-ranging enquiry?

Back the debt truck up — we need big ideas like the People’s Bank

by Bernard Keane

Back at the start of the year I suggested the economic crisis had taken us into a new world where the role of government had been transformed, and hoped that our best economists should start thinking about where we go from here.

Today several of our best economic thinkers from across the ideological spectrum did exactly that, with an open letter urging a comprehensive review of the Australian financial system ?—?and how it interacts with those across the globe.

The timing couldn’t have been better, coming the day after Malcolm Turnbull revived the debt truck from the early nineties and the ALP ?—?who had evidently been waiting for just such a moment from the Coalition ?—?replied with the clunkier “Supporting Jobs Truck”, which presumably hasn’t been donated by John Grant. While our politicians mess about with trucks, there are pressing issues to deal with.

There are a couple of key issues identified by the economists that have so far not received the attention they deserve. One is that the collapse of the residential mortgage-backed securities (RMBS) market ?—?in essence, non-major bank lenders ?—?has indirectly put pressure on business lending, and particularly higher-risk business lending, because the big banks have moved to fill the gaps left by the RMBS market. This goes, as the Prime Minister would say, to the vexed issue of whether bank capital costs really have increased, as they claim.

Another is that it is not merely global capital markets that are interconnected, it is government policy that is similarly interdependent. New policies already implemented, and being now developed in other countries will have significant impacts on the Australian financial system, but we don’t as yet have any comprehension of the nature of these impacts ?—?and no process for doing so.

Above all, they worry that it may have been good luck rather than, or in addition to, good management that meant the Australian financial system was relatively safe from the sort of disasters that beset the American and European systems. How will we fare next time?

The letter raises fourteen specific questions, each of them meaty issues. There is plenty to alarm the big banks, but the most disturbing will be a suggestion that consideration be given to a basic financial service based on existing Government infrastructure such as Australia Post.

In particular, the group wonder whether there is a role for a publicly-owned entity like Kiwibank in New Zealand, which operates from post offices and participating retailers, but offers both deposit-taking and lending, including business lending.

A more minimalist option would be the establishment of a deposit-taking entity that invested in the Future Fund. That would increase competition for deposit interest rates, whereas a full Kiwibank model would challenge the big banks across most of their activities. It would require significantly greater infrastructure and expertise than a simple deposit-taking entity, but not necessarily need to replicate the full branch-based structure of the major banks.

The proposal flies in the face of what was accepted wisdom before September last year; now, however, even in Australia government is deeply enmeshed in the financial system via the bank guarantee and its own efforts to prop up the RMBS market (not to mention the stillborn ABIP proposal).

It merits serious consideration because the long-term project ?—?pursued by both sides of politics ?—?to maintain competition in lending in Australia is failing. It depended on the availability of externally-sourced capital for the RMBS market, which was fine while the world financial system was spilling over with finance but ended the moment the crisis hit ?—?especially after the bank guarantee massively strengthened the hand of the major banks over what was left of the non-bank lending sector.

Now we are left with a true oligopoly, operating in a manner indistinguishable from a cartel and unable or unwilling to reduce business lending rates.

It’s hard to see what downsides there are for the Government in conducting the sort of inquiry urged in the letter. It has handled the triage stage of the financial crisis very well. Now is the time to take a step back and consider an overarching strategy. As the Prime Minister noted in his comments overnight in Germany, managing the recovery sustainably will be as challenging as managing the crisis itself.

How long until the Government is again confronted with one of the banks unilaterally raising interest rates, particularly for business lending? The problem of Australia’s banking oligopoly needs a long-term solution.

Crikey understands that one of the Wallis Inquiry members, Prof Ian Harper, also strongly supports the idea of a new inquiry.

As Christopher Joye told Crikey, “…the financial world has changed more in the last 13 years since Wallis than it has in the last 40 years… The key message of the letter is that it would be a massive mistake for the politicians and bureaucrats to persist with the self-congratulatory hubris. The fact is Australia was very lucky to skate through the crisis unscathed. Our system is good, but also has many glaring flaws.”

Something for the politicians to think about while they’re playing with trucks.

While that’s largely true, it doesn’t mean that only unseen structural forces are to blame. We could debate the responsibility of people like Alan Greenspan til the cows come home (and others have). But we don’t need to – we can look at a much more contemporaneous cause of the ongoing mess.

As Paul Krugman argues, the “dithering” of the Obama administration is a huge worry. There appears to be a bedrock ideological resistance to taking banks into public ownership (albeit temporarily). Hence all the talk of “zombie banks” and the continuing lack of liquidity in credit markets. Nothing has been done – effectively – to track down the toxic debt, and credit markets remain close to frozen.

Kevin Rudd is right to blame ideology for a large part of the world’s current economic woes. But the closest thing America has to a social democratic administration is compounding, not ameliorating the problems.

Rudd’s rather anodyne response to this threat is that “we will continue to work in partnership with the private sector to do what we can to support Australia’s credit markets.” This means more work for the Government-banking oligopoly combination. Bankers and officials have been busy discussing options while the rest of us were having a break.

This approach — and this is not to suggest there’s a viable alternative — is not merely entrenching the position of the major banks, which have been allowed to consume competitors, but also entrenching the Federal Government at the heart of our financial system.

It’s not nationalisation; it’s more like the worst of both worlds. Politicians and bureaucrats are now key decisionmakers in our financial system, but they have limited control via the major banks, which continue to operate — as they’re required to — in the best interests of their shareholders. Responsibility and accountability are diffused between ministers, Treasury, agencies and the banks themselves. And there are multiple ways in which it could go wrong. Taxpayers could be left, via government guarantees, with failed businesses and debt. Business might struggle to obtain necessary capital. The only guaranteed winners are the big banks…

The AFR’s editorial today on this mess noted “extraordinary times call for extraordinary measures, but their long-term effects are likely to be profound, and they need to be managed with as much care as possible…”

Those long-term effects have been more or less ignored until now, in the urgent need for action. What’s the Government’s exit strategy to eventually remove itself from its now dominant role in the financial system? Does it intend to exit at all? And how much of a trade-off are taxpayers getting from the privileged financial and policy-making role now accorded the banking oligopoly?

The working theory, both here and overseas where the simpler option of nationalisation has had to be pursued, is that governments shouldn’t be in finance, and will get out just as soon as they can while maintaining the stability of the financial system.

This may prove to be wishful thinking, and not only because the duration of the financial crisis and the wider recession is unknown. Wartime policies have a habit of persisting long after victory has been declared. Our better economic thinkers should be turning their attention to the new financial system we’ve suddenly acquired over the last six months — and how much of it we want to keep when — if — things get back to normal.

I think Keane is right that there’s some danger in both ignoring the longer term implications of some of the crisis management decisions being taken, and of ending up with the worst of both worlds with public involvement in financial decison-making. I think Keane’s bias is probably towards the free market end of the ideological spectrum, and I suspect that a lot of those making such decisions and defending their necessity are unwilling (unlike Keane) to contemplate their long term effects precisely because the nature of the decisions runs so spectactularly counter to their liberal predilections.

Having said that, John Quiggin is one exception to both rules, and has made an interesting case – in debate with Paul Krugman – for doing bank nationalisation properly if you’re going to do it at all:

Financial restructuring is going to be a huge challenge, involving both a radical redesign of national regulations and the construction of an almost completely new global financial architecture. To attempt this task while leaving the banks under the control of discredited managers nominally responsible to shareholders whose equity has, in the absence of massive transfers from taxpayers, been wiped out by bad debts, seems like doing live electrical work while wearing a blindfold and standing in a pool of water.

In The Guardian, Will Hutton explains why measures to halt the cascading crisis have been ineffectual to date. He might have made more explicit the implication that one of the basic structural problems is that action taken at the level of the nation state can be counter-productive given the disseminations and movements of capital, and that there are real domestic political barriers to coordinated action, as well as all the obvious problems of concertation through institutions such as the EU and the G20.

But he does make this point – harmonising with the note I’ve been sounding repeatedly – very clearly indeed:

There was no effective opposition. The left and organised labour collapsed as intellectual, social and political forces; there was no conviction that any alternative to this shareholder value-driven, financial, ‘securitised’ capitalism existed, or any political muscle to support it even if there were. Mainstream culture moved away from public purpose and fairness; the new priorities were individual self-fulfilment, personal experience and loyalty to self.

Hutton is perhaps more sanguine than I am, though, about the capacity of state action to turn all this around. In essence, he’s making an argument he’s been making for some years – about the virtues of other forms of capitalism than that which has been hegemonic in the neo-liberal Anglosphere. He briefly had some success in influencing Tony Blair in the early days of New Labour – in opposition, to be precise – in pushing ideas about “Stakeholder capitalism”. Whether a reorientation to a capitalism focused on the medium rather than the short term and on the real rather than the financial economy would work now – or whether as John Quiggin seems to think the Gordon Browns of the world are predisposed to be pushed, however much they might kick and scream, in something like the correct direction, is perhaps anyone’s guess as events continue to move at breakneck pace.

Immanuel Wallerstein puts a contrary view. I’m not quite sure if I agree – though he’s right more often than most. It is certain that what is occurring is Schumpeterian “creative destruction”, but whether or not the capacity to begin the cycle of valorisation and capital accumulation anew exists is something I think it’s better to be agnostic about at this stage. While I dare say he’s right about the end of a Krondatieff cycle, beyond that, prognostication seems to have a very short shelf life in these times.

It’s also interesting to observe that some are suggesting that the Canadian Tories’ “steady as she goes” approach is precisely what is leading to their decline in support in the campaign which has reached its final stretches. It may well be that Stephen Harper has more problems than just perceived inaction in the face of the credit crisis, but it probably is significant that voters are demanding state action to propitiate fear. In the Australian context, I wouldn’t be at all surprised if Kevin Rudd and Labor are able to consolidate their support at a time when their momentum may have been sagging. The “cut through” of the opposition really diminishes at times of crisis, and it may be that Rudd has a chance to entrench himself with his response. To some degree that’s dependent on how far Australia is able to resist the global push towards recession, and again, I really would hesitate to place much value in any predictions at this stage.

Iceland right now is apparently in a state of shock and gives a snapshot of what a depression with the Great in it will look like everywhere – “cafes were half-empty, real estate agents sat idle, and retailers reported few sales” says the AP.

This after the government basically took over its banking sector, with Russian money, which as noted in the linked post, has real geopolitical implications.

Meanwhile, the British government is laying out 500 billion pounds to take equity in its banking sector, but basically proposing business as usual. Co-ordinated interest rate cuts are having very little impact on the stock market, and more worryingly, on the liquidity crisis. Paul Krugman writes:

We’re way past the point at which conventional monetary policy has much traction.

In America, in the eye of the economic storm, the Fed has basically become the financial system, but to little avail:

The time for a recession was 2005. At that time simple macroeconomic policy; simply raising interest rates, would have ended the bubbles in credit and housing at the cost of a standard if somewhat nasty recession. Trillions of dollars of intervention would not have been needed. Just standard macro policy. Even in 2006 it might still have worked. The Fed blew it, and they broke the system, and now with the system broken they may have to either buy it all out (and Paulson may be considering that after all) or just become the system. And even if they do that may not work, because, well, who wants to borrow and invest right now?

Bernanke and Greenspan are certainly in the “worst Fed chairman of all time” stakes in a big, big way.

So what does all this mean? It’s not “financial socialism” or the “end of capitalism”. While there are some truly absurd narratives circulating about how the meltdown is all the fault of… you guessed it, regulation, the Left and/or Bill Clinton, this nonsense is not unrelated to the coincidence between the financial meltdown and the American Presidential election, and it can be disposed of very easily:

Although financial institutions were evaluated for compliance with the act, it never required they lose money on mortgages or that they be given to people with slim prospects of repaying them. Even if, as some claim, the legislation ultimately played a part in encouraging excesses, such as the bundling of sub-prime loans into packages that hid their riskiness, that was a failure not of too much but of too little regulation.

[Mike Steketee]

What conservatives can’t point to, ultimately, is any form of regulation that actually caused the crisis. No one put a gun to the head of US bank executives and made them lend to people without the means to repay loans. No one threatened dire retribution to investment bankers unless they packaged sub-prime securities. And no one compelled Standard and Poor’s and Moody’s to inexplicably and wholly irresponsibly rate those securities at AAA levels even when they didn’t understand the packaging mechanisms being used.

[Bernard Keane]

As Keane points out, this sort of thing is a classic example of the moveable feast that is the right wing opinionating machine – an “ownership society” and aspirational citizens were the mark of the success of right wing governments yesterday, and today evil lefties encouraged passive banks to lend money to all sorts of unsuitable poor people.

While it may be difficult at the moment for the Right to point to capitalism as a roaring success story, what’s occurring in response is very far from being socialism, or even nationalisation.

John Quiggin writes:

This kind of instalment-plan nationalisation seems to offer the worst of all worlds. At some point, a more systematic approach will have to be adopted, and given the rate at which markets are plummeting, the sooner that point comes the better. This isn’t the return of socialism, but it certainly looks like the end of the kind of financial capitalism that has prevailed for the last few decades.

And his opinion is echoed by a socialist blogging sociologist:

And what about the future of capitalism itself? No one is saying the system itself has collapsed, rather what has gone down the tubes is a particular way of organising capitalism. It is too early to tell what could replace it, though a number of participants flagged up the possibility of a more regulated capitalism, albeit without the welfare and full employment commitments of post-war Keynesian capitalism. It’s also likely that Neoliberalism will continue to cast its shadow.

And in a rather pithy article from Andrew Crook of Business Spectator:

Western economies, with their manufacturing industries gutted and the entrails shipped abroad, are struggling to actually produce anything beyond amorphous “services” and intellectual property. This has mirrored the spread of cancerous and impossible-to-decipher debt instruments, producing the biggest financial bubble in world history. That bubble has just burst.

Sub-prime mortgages may have been the bitter pill, but it’s the yawning distance between these debt vehicles and the bricks-and-mortar of our everyday lives that could prove fatal.

Assuming the current crisis doesn’t result in the second coming of socialism, we’re left with the familiar remedy of ever more-regulated domestic markets. But the genuine policy levers of an earlier era remain out of reach.

Over the last 30 years, the Keynesian social fabric has being steadily eroded by the slavish adherence of Western governments to global market forces (“external harmonisation”) as a non-negotiable pre-cursor to domestic policymaking. Despite the tinkering of Rudd and co, this remains broadly the case. Not that they’d have you believe it.

As I’ve been arguing, the political logics behind neo-liberalism remain well entrenched, despite the recourse had by panicked “free markets” to the “nanny state”. Mark Davis agrees neo-liberalism isn’t finished:

It’s a nice idea, but underestimates just how deeply embedded neoliberal ideas are in the global finance system. My sense is that the bail-out, now passed by the US senate and to be revoted on in Congress tomorrow, will happen, even if it won’t necessarily work because there’s more to this than simply lancing a boil. Regulatory noises are being made and some tightening will take place. But the system will stay relatively unchanged because too much depends on it and because money and power have little respect, in the end, for principle.

We have essentially two problems at the moment from the point of view of the conjuncture of political economy and the alignment of social and economic forces. The first is that social democratic parties have bought into the logic of the dominant paradigm to such an extent that there are very few alternatives on offer. The second is that neo-classical orthodoxy has led to such a mismanagement of the global economy that states appear bamboozled in the face of a liquidity crisis, and few orthodox solutions appear to offer any hope of turning the situation around in the short term. We will probably see some sort of stabilisation, though perhaps not for a while, and we will also see the emergence of a new orthodoxy not too dissimilar to the old one as the superficial lessons of the crisis are absorbed and the wagons of the powers that be circle the camp.

So, if the policy cupboard is bare, and ideologues are trying desparately to readjust themselves to some version of “culture wars as usual”, what is to be done? Andrew Crook, once again, is absolutely on the money:

The broader challenge for the Left, and for politics, is to imagine a radically-different regulatory framework with actual meaning for alienated individuals struggling, in a world of tumult, to carve out a viable identity and a cohesive personal narrative. This won’t come from centre-left policy elites—it requires a new breed of social movements to organise around these faultlines and assert their right to economic and cultural autonomy.

But the outline of such a movement is only just being sketched and echoing Paulson’s doubters on Wall St (the Dow has lost 13 per cent of its value in the last five sessions), there’s little reason to believe conditions on Main St, or anywhere else, will begin to improve any time soon.

Update: New post here. Comments are now closed on this one.

I’m not sure, though, how “market sentiment” of “it’s 700 billion or the apocalypse” will deal with this development.

More at OpenLeft.

Ps: Paul Keating on Lateline last night made some very instructive points about why pumping liquidity into markets isn’t working and why Malcolm Turnbull is playing a populist game on interest rates.

Update: The Senate’s lone socialist, Bernie Sanders of Vermont, reflects on the TARP bill’s Senate passage:

This bill does not deal with the absurdity of having the fox guarding the hen house. Maybe I’m the only person in America who thinks so, but I have a hard time understanding why we are giving $700 billion to the Secretary of the Treasury, the former CEO of Goldman Sachs, who along with other financial institutions, actually got us into this problem. Now, maybe I’m the only person in America who thinks that’s a little bit weird, but that is what I think.

And Glenn Greenwald saw the bill’s rejection in the House as a victory for democracy. Which it sorta is… but perhaps only because the imminence of the election is concentrating Congressional minds. But the fact that substantive alternatives to the bill – or amendments – which seek to modify its nature such that it’s not just a bailout are unlikely to go anywhere should also concentrate the mind.

I do not want to hear people tell me that regulation cripples the economy, unless they are willing to admit that a lack of regulation can also cripple the economy. Not ever. I don’t understand why anyone is so much as tempted to think that “regulation” is good or bad, as a whole: to me, that’s like being for or against “things” or “people”. Some regulations are good, some are bad; obviously, we want people in government who can tell the difference, and implement regulatory systems that work well. However, altogether too many of my fellow citizens were willing to listen to ideologues, and now we all get to pay for their mistakes.

Very oddly, Malcolm Turnbull has proposed that the federal government in Australia should also bail out Australian banks. Now, unless he’s suggesting that the banks should have their exposure to Lehman Bros. etc. paid for gratis by the Australian government, to the benefit of their share price or something, it’s hard to see how this makes any sense, particularly when Turnbull has been blathering all round the shop about Kevin Rudd and Wayne Swan “talking down” the Australian economy (and thus magicking inflation into existence – it wasn’t at all Peter Costello’s fiscal profligacy, no matter what the IMF may think). One can only infer from this call that there’s an implication that there’s some disaster waiting to happen domestically.

Unless Turnbull is suggesting that the Australian government should compensate the banks for their exposure to Lehman Brothers or whatever, it’s really quite hard to work out what he’s saying here. Obviously, it’s a bit of politicking, tied up in a neat package as it is with his “bipartisanship” theme, and it may also be designed to imply that while the Bush administration has a Plan, Rudd doesn’t. But it’s difficult to read it as anything other than irresponsible, despite the instant anointing of Messiah Mal with the all important “economic credibility” by the media.