There have been three constant themes in the Rudd government’s rhetoric about the global financial crisis.
The first is that Australian banks are fundamentally sound, unlike those in America, because Australian regulation has been better. There is no sub-prime crisis in Australia.
The second is that Australia is unlikely to go into recession because of the wonderful government surplus, the well-run economy, the lack of government debt and the demand from China for Australian resources.
The third is the declaration that the government will do whatever it takes to keep the economy running.
The first two are outright lies; the third a piece of bravado.
While it’s true that Australian governments never embraced the extremes of deregulation seen in America, they did abolish the most significant controls on bank lending, such as compulsory deposits with the Reserve Bank, and watered down rules requiring the banks to keep large cash reserves. All these changes made Australian banks more vulnerable in a crisis.
The official bank regulator is APRA. Its capital adequacy rules are so weak that the major banks voluntarily maintain about twice the level required. Even so, the Commonwealth Bank, for instance, has a Tier One capital–essentially shareholders capital–of just 8 per cent of its assets of around $500 billion.
This shows us how inherently vulnerable the banks really are. Those assets are loans to businesses and individuals, and about 40 per cent of the amount is for home loans. It doesn’t take too much imagination to realise that a serious economic downturn, with businesses shutting down and a collapse in house prices, could drive down the value of the Commonwealth’s assets and threaten the bank.
A nasty recession could put Australia’s banks in the same position as some of Britain’s–needing capital from the government to simply be allowed to function.
It is an open secret that during the financial crisis of 1992, Westpac was on the brink of bankruptcy. This crisis promises to be much worse than 1992.
The Rudd government has done nothing significant to fix this up. Astonishingly, it is allowing banks to pay dividends to shareholders, rather than use their profits to boost their reserves.
Rudd’s hubris about the banks goes alongside an extraordinary complacency about Australia’s real estate bubble, which has been every bit as bad as America’s.
While the global crisis was sparked by sub-prime lending–to people who couldn’t pay back their loans–the main underlying problem was that real estate had become a bubble. American house prices have now fallen a staggering 18 per cent, and they are still falling. Tens of millions of people have seen all the money they put into buying their home disappear and prime-mortgage defaults are ballooning.
The real estate bubble in Australia is just as bad as America’s, and will just as surely unwind. Economics lecturer, Steve Keen, has shown that compared with wages, Australian house prices have doubled since the mid-1980s, and gone up 60 per cent since the mid-1990s. But wages are what we rely on to pay for mortgages. A recession, with jobs lost and wages pushed down, will almost certainly see a cut in house prices.
It was no accident that one of Rudd’s major actions has been the boost in the first home-buyers grants. He desperately wants to hold up house prices, to protect the banks and Australian capitalism in general. So he’s turned himself into a real-estate booster. Billions will be spent luring young people into buying homes, just as housing prices are set to fall and jobs are set to be slashed.
The real, underlying problem here is that one of our most basic needs, housing, is an object of profit and speculation within the capitalist system. A Labor government ought to be spending these billions to expand public housing–housing that is desperately needed now, and will be far more necessary in the coming years.
Housing debt in Australia is part of a general problem. Collectively, Australians owe more than one and a half trillion dollars–that’s 50 per cent more than the entire annual GDP.
When the government boasts about being debt-free, it conveniently forgets to mention this unsustainable–indeed dangerous–private debt. But the entire logic of the financial crisis is that debt obligations are being unwound. Somehow, somewhere, that debt will have to be dealt with.
A large proportion–perhaps a third–is owed to overseas banks and other lenders. In other words, much of the Australian boom of the last six years has been funded by borrowing overseas. Given the financial crisis, many of those lenders may demand repayment, simply to save their own businesses.
If foreign capitalists start demanding their money back, then the crisis could be extremely severe.
Who really benefits from Rudd’s response to the crisis?
Kevin Rudd’s response to the global financial crisis has certainly been bold. But will it work?
Apart from the attempt to prop up housing prices, Rudd originally gave an unlimited guarantee for bank, credit union and other regulated deposits. (It is now capped at $1 million.)
Rudd was desperate to forestall a possible run on one of the banks—like the run that destroyed Britain’s Northern Rock bank in August last year.
However the guarantee has created panic among investors in other areas. As soon as the bank guarantee was given, investors rushed out of unguaranteed mortgage securities, creating a new crisis.
The third element to Rudd’s strategy is the money being given to pensioners and carers, and money to be allocated for infrastructure projects.
This is straight out of the Keynesian recipe book: use government money to stimulate the economy in a downturn.
But Rudd’s priorities are absolutely clear in the way he has treated pensioners and unemployed people. The one-off payment to pensioners and carers is designed to go straight into the pockets of the big retailers over Christmas. There is no boost to increase their miserable allowance to a living income.
For the unemployed, whose benefits are less than pensioners, there is nothing, even though the numbers of unemployed are set to rise by up to 300,000. Rudd’s concern is for the banks and the government’s accounts, not for those who will lose their jobs as the economy slumps.
All Rudd’s policies are aimed at shoring up capitalism, at the very moment when its bankruptcy is becoming more and more obvious.
By Phil Griffiths