Home > Economics - General > The global spread of the financial crisis

The global spread of the financial crisis

February 4th, 2009

Jim Henley asks a lot of good questions

There’s an awful lot of right/conservative/soft-libertarian economics I consider well and truly refuted by events. That said, I haven’t seen progressive thinkers grappling with the global nature of the current downturn, which seems to be falling on the social democracies and neoliberal regimes and post-mercantile states alike. What does it mean that pretty much all national economies are in a tailspin, regardless of model? Are the safety-net features of the social democracies successfully blunting the impact on their citizens? In ways that can be sustained through another year, say, of recession? Is the protectionism of post-mercantile states in East Asia protecting their industries more than the less protectionist regimes of the neoliberal countries?

I’ll try and answer these, with more confidence on some points than others.

Looking at the global impact of the financial crisis proper, it’s evident that the investment banking business (pre-crisis) was so globalised that, even though the immediate problem started with defaults on US mortgages, US and international banks suffered about equally. So the magnitude of the impact on any given country depended mostly on the ratio of banking sector assets and liabilities to national income, and this was not closely correlated with social democracy/neoliberalism. Iceland was the extreme example, a social democracy which nonetheless was ranked near the top on measures of “economic freedom” thanks to massive financial deregulation in the 1990s. The ratio of bank debts to income was so high that even the immediate nationalisation of the major banks, when they hit trouble back in October, did no good.

The severity of the immediate financial crisis depended both on the magnitude of the impact and on the capacity of governments to respond. The big losers here have been countries like the Baltic states, which relied heavily on capital inflows and have failed to build up the capacity to raise government revenue (it’s not so long ago, that the governments of these states were being lionized for their adoption of a flat tax system). By contrast, most of the richest countries have been able to finance bailouts of various kinds. It’s arguable that the US, which already had chronic deficit problems going into the crisis, would have suffered more if it weren’t, like Citigroup, too big too fail (and maybe too big to rescue also). Countries that suffered little immediate impact included Australia (we had a big banking crisis in the early 1990s, so regulators were more cautious, though thye were unable to stop a housing bubble that may yet burst ) and India where pressure for financial liberalisation was successfully resisted.

As the financial crisis translates into sharp falls in consumption and investment demand, all countries have been affected to a greater or lesser extent. Given the rapid and near-universal conversion to Keynesianism, it’s going to be hard to draw lessons about the relative performance of economic systems from cross-country comparisons of the severity of the recession, but I suppose the very universality of the shift is indicative of something.

Finally, there’s the question of the extent to which social democratic systems will soften the impact of the crisis on households. This impact has two parts: direct effects associated with the financial crisis, and indirect effects of recession, rising unemployment and so on. Both appear to be worse in countries which have pursued economic liberalism rather than social democracy. On the first point, the pattern of expanding credit, low or negative household savings and asset price bubbles characterized most of the English-speaking countries (Iceland and Spain as well, but the pattern was most evident in the Anglosphere). The collapse of this bubble is being reflected in high rates of foreclosure and bankruptcy, with the associated dislocation for the households involved.

As regards the recession, we have yet to see the impact, but there’s already evidence to suggest that the US social welfare system (including unemployment insurance, TANF and other measures) is unable to handle the load. The same is true, with more dramatic effects, in the Baltic states and other formerly Communist countries that have embraced economic liberalism, or simply failed to develop an effective social welfare system to replace the employment-based system that collapsed with the end of Communism. In my view, the difficulties of countries with weak social welfare systems are only going to get sharper in the next couple of years.

Finally, I doubt that mercantilism, at least in the export-oriented form common in East Asia is going to be much of a protection. China is already suffering from a big drop in US export demand and the same will be true elsewhere.

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  1. smiths
    February 4th, 2009 at 12:48 | #1

    personally it would help me to understand this proposed differentiation if i had some idea of which countries are referred to,

    as in, which are the ‘social-democratic’ countries and which are the neo-liberal countries?

  2. smiths
    February 4th, 2009 at 12:55 | #2

    and also

    >i>5. I’m still concerned about the question of how much we know about the real economic history of the United States over the last decade or even three.

    how about asking that for the whole world,

    and while we are on it, how about looking into the abundant evidence that not only is gold permanently suppressed through interventions to mask the dubious nature of the real economic system, but that interventions and manipulations by the central banks and private ones like morgan and sachs are the norm,
    that is, the idea of a free market is an illusion

  3. Tony G
    February 4th, 2009 at 13:31 | #3

    Smiths said”

    as in, which are the ’social-democratic’ countries and which are the neo-liberal countries?”

    When Australia was liberal, it was going OK, now it’s socialist like this country , it appears not to be going as well.

  4. Alanna
    February 4th, 2009 at 13:43 | #4

    Tony, #3
    Never ceases to amaze. He is still slaying the reds under bed. The cold war is over Tony, the McCarthyists have mostly passed away and so has your party electorally Tony, and unless they take a few steps to the middle they wont be back anytime soon – the voters are justifiably cranky!.

  5. Tony G
    February 4th, 2009 at 13:56 | #5

    Alanna,

    “all national economies are in a tailspin, regardless of model”

    Social democrats are putting socialist ideals as being the answer, well its a lie look at China.

  6. Chris Warren
    February 4th, 2009 at 14:00 | #6

    Tony G

    Maybe if you think very carefully you might discover that something else, rather obvious, happened from when the Liberals were in power to when the ALP was in power.

    So if Australia is not going as well now – what else may have been a factor?

  7. Ben
    February 4th, 2009 at 14:08 | #7

    Lol Tony G

    I wouldn’t call China a socialist country (at least not since Mao died).

    They only country I can think of these days who even remotely pays lip service to ‘socialism’ is Cuba, and I don’t think that is a country that anybody should be in a hurry to emulate…

  8. O6
    February 4th, 2009 at 14:24 | #8

    PrQ, “so [Australian] regulators were more cautious, though they were unable to stop a housing bubble that may yet burst”.
    With median dwelling prices at seven times median income, compared with the historical 3-5 times, it must burst, musn’t it? Or will dual income households save the day?

  9. smiths
    February 4th, 2009 at 14:30 | #9

    dual incomes are not enough,

    my seven year old son has been removed from school and is selling cigarettes door to door,

    and the cat is on a treadmill providing us with electricity

  10. Monkey’s Uncle
    February 4th, 2009 at 15:03 | #10

    As regards the second and third last paragraphs, it may well be true that countries with larger safety nets are able to cushion the impact of economic failure.

    But ultimately the welfare state depends on the success of the market economy to continue to produce the economic surpluses that can then be redistributed to fund various programs. So it’s not clear how any country can maintain strong social welfare systems in the absence of the market economic success needed to fund them. Eventually more government spending and economic decline are unsustainable.

    Of course, if governments are willing to run larger deficits and fund more safety nets it may cushion the fall in the short term. But this simply amounts to delaying the costs of mounting debt a little longer.

    It seems there are a lot of people used to a standard of living they can no longer afford, and so they want taxpayers to bail them out.

  11. Alanna
    February 4th, 2009 at 15:16 | #11

    Smiths#9
    Who is supervising the cat?. Adding a dog to the treadmill might give real productivity gains.

  12. Alanna
    February 4th, 2009 at 15:30 | #12

    Monkeys Unncle#10 says
    “So it’s not clear how any country can maintain strong social welfare systems in the absence of the market economic success needed to fund them.”

    Well as I recall we just passed through an amazing boom for a decade but not one tight sod in the prior government wanted to pay for social welfare systems. I have a real complaint in how single mothers were treated. When your grocer tells you its disgusting how his daughter was treated by centrelink (and how leniently the absconding father was treated) you know something is very wrong (and more so when you know he has voted liberal all his life).

    So much for the view of the Menzies government whereby having children was seen as a “form of national service” and where possible “women in need should be supported to the extent possible that they may choose to stay home and raise children” and it was seen as in the best interests of children.

    Yes indeed, how times have changed, but you can measure the civilisation of a society by how it treats its women. All that misogynistic JH led coalition offered was a boot and extreme (and I mean really extreme) hardship to many single mothers. The Welfare resourcesm (and the lack of childcare resources) for single mothers are probably one of the most stinging indictments of their miserly attitude to welfare.

    We had plenty of money to pay for it. That wasnt the problem.

    In other countries where childcare is heavily subsidised by governments there is a very high labour participation rate for single mothers BUT not here in Australia.

  13. Alanna
    February 4th, 2009 at 15:38 | #13

    Oh and one of Howards departing manoevres to further intimidate single mothers. Capping the fathers income at 100grand for the purposes of working out what he should pay in maintenance – no matter whether he earned 22 million a year working in the millionaires factory and no matter whether he had 6 kids or 1 or had been married 25 years or 1 year. Father was deemed to earn only 100K maximum of which a fraction, like around 30% would go to the childrens maintenance. Nice parting shot of John Howards to single mothers who have least ability but now most of the burden to pay for the children of separated families – now around 30% of all families with children (goodbye and good riddance).

    If you have a close look at their policies – for women, for youth, for the culturally different, for aboriginies, for the less well off amongst us, you might just come to the conclusion it was a party for old white male and as such they may have real trouble getting back in for a generation.

  14. Tom
    February 4th, 2009 at 17:01 | #14

    The way I figure it, capitalism is like a meal that’s 90% haute cuisine and 10% deadly poison, with the latter making the former irrelevant

  15. TerjeP (say tay-a)
    February 4th, 2009 at 17:23 | #15

    So how well is Cuba or North Korea weathering the storm?

  16. Alanna
    February 4th, 2009 at 19:03 | #16

    You need the poison tasters to regulate the poison out of capitalism Terje (always have always will – otherwise its a disorganised pigfest amd a recipe for a crash). Comparing Cuba or North Korea not really fair…bitmore extreme than a sensibly planned capitalist system… but thinking in the same vein it cant be a Marie Antoinette capitalism either.. let the poor eat cake if they have no bread (if they can afford to choose to pay the price).

  17. February 4th, 2009 at 19:46 | #17

    I agree with nearly all of what John Quiggan says here – I’ll simply try to expand on one aspect.

    “What does it mean that pretty much all national economies are in a tailspin, regardless of model?”

    It means with globalisation economies (and particular finance and the trade of goods (more so than services)) are more connected than before. So firstly, these type of distinctions between countries aren’t as relevant (at least to this point in time) as individual countries have less power. Secondly, these political distinctions don’t have a big relationship to how governments did/did not regulate their markets. Again all political/economic models seemed largely irrelevant and all models “failed”. While the overall ideas that “Markets work when left alone” and “capital should be allowed to flow freely” are neo liberal ones, they have been ubiquitously accepted across political boundaries. As John Quiggan says “So the magnitude of the impact on any given country depended mostly on the ratio of banking sector assets and liabilities to national income, and this was not closely correlated with social democracy/neoliberalism. ”

    It seems to me here blame must also be laid at the feet of social democrats – they are the alternative philosophy in the developed world. Where were the alternative ideas let alone the alternative implementation of the ideas?

    While everyone was making money social democrats were happy to simply be a bit more progressive with distribution of wealth and have more of a safety net etc. Where was the effort to try to understand where the money was coming from? Why the lack of questioning of the pollyana assumption that asset prices go up indefinitely?

    What were the regulators doing in social democratic countries where you would expect them to have some political backing? As far as I can see they had become beholden to those that they are meant to regulate and even this crisis has not changed this. What are the regulators actions now – ban short selling and try and minimise negative rumors – asset prices should only go up not down. What about the level of misinformation from companies about their level of risk? Hardly a murmur from regulators let alone a prosecution. What is the reaction to banks that took on more risk than they should have (and thus risk the wider economy)? We bail them out, guarantee their loans, protect the interests of bondholders and shareholders. The alternative is not even discussed – let the insolvent ones go bust, invesigate failures, sack and or proscute those that did a bad job, set up a clean banking system.

    Following a fiancial crisis the usual response is to regulate. With globalisation their are less regulatory options and the impacts of regulation are less certain. I believe the best way forward in the medium term is to try and get financial markets to work better so that booms do not get out of control. The two alternatives of either: replacing the market with government, or reregulation, are not promising.

  18. Salient Green
    February 4th, 2009 at 19:47 | #18

    #15, Cuba has been hampered by a travel and trade blockade for half a century. They are also hurting due to a spate of hurricanes as well as low commodity prices due to the GFC.
    http://www.embassymag.ca/page/view/irony_financial_crisis-12-3-2008

    Both Cuba and North Korea have very low carbon footprints for developed nations.

  19. El mono
    February 4th, 2009 at 21:10 | #19

    Neither Cuba or North Korea are developed nations

  20. February 4th, 2009 at 21:20 | #20

    Pr Q says:

    the magnitude of the impact on any given country depended mostly on the ratio of banking sector assets and liabilities to national income, and this was not closely correlated with social democracy/neoliberalism.

    Australia has a higher financialised asset price to industrialised income earning ratio than most comparable nations. According to Matt Wade of the SMH (2005)

    household debt [has] more than doubl[ed] in the past five years to $810billion. Debt is now worth 150 per cent of household disposable income compared with 50 per cent in the early 1990s.

    This brute fact has been the foundation for Steve Keen’s frequent jerimands about debt and housing bubbles. I have said much the same thing for most of the past decade.

    AUS also has two other major risk factors which are now in evidence. We suffer from massive reliance on foreigners for:

    1. costlier capital imports

    2. cheaper mineral exports

    Commentators have been highlighting our increased risk for most of the second half of the noughties. Tim Colebach of the Age remarked on our vulnerability on the foreign debt score in 2006 at the height of the commodity/equity/property bubble:

    Studies show the largest share of debt is owed by the richest 20 per cent of households. Many are borrowing to take advantage of Australia’s generous tax rules for investors.

    But the pessimists argue that soaring debt makes households vulnerable when times get tough. Our eight million households on average now owe $125,000 each. We spend 11 per cent of our take-home pay just to pay interest on our debts — way above the 9 per cent we paid in the high-interest days of 1989-90.

    Mr Macfarlane’s real concern is what the debt might do to the economy….In 1990-91, he said, household spending held up despite crashing business investment, ensuring that the recession was relatively shallow. “What I fear is that next time the household sector won’t be the same source of stability,” he said. “The household sector might tighten its belt, really very sharply.”

    Another concern is that the value of our housing assets rests on global markets’ willingness to keep lending us $50 billion a year. Our growth in spending is being funded mostly by growth in borrowing, only secondarily by growth in income. What would happen to housing prices if the foreign money stops?

    That means we should be more prone to the crash than other Angloshphere countries and any crash that occurs should be deeper. So why hasnt the AUS economy crashed harder than say the UK? And why is AUS responding more effectively to the GFC?

    It appears that foreign savers are still willing to loan us money to fund our household, corporate and governmental investment plans. Indeed our banks and federal government now have the best credit ratings in the world. So no big need to slash consumer spending. There is something different about AUS.

    Pr Q says:

    The severity of the immediate financial crisis depended both on the magnitude of the impact and on the capacity of governments to respond. The big losers here have been countries like the Baltic states, which relied heavily on capital inflows and have failed to build up the capacity to raise government revenue

    The reasons why AUS has escaped the worst of the GFC so far all point to what I call the Howard-Costello model of political economy:

    1. Better quality loan providers: Costello promoted much more stringent financial regulation in the wake of the eighties-nineties entrepreneurial shenanigans eg APRA have made our banks look better relative to the RoW;

    2. Better quality loan servicers: HOward promoted much higher ratios of skilled immigration which underlies the residential investment property market. The massive increase in accommodation demand means that there is little danger of high vacancy rates forcing fire sales of investment properties that have characterised the financial meltdown in the US and UK.

    3. Both Howard and Costello oversaw a long string of surpluses, asset sales and a corresponding amortisation of federal debt. This has placed the Commonwealth in a fairly sound financial footing with which to finance fiscal stimuli.

    4. A solid widening of the tax base mainly through the implementation of the GST. Also our welfare delivery system is pretty efficient.

    I am the first to admit that “I was wrong” as regards the likelihood of a financial crash in AUS. I have been predicting the bursting bubble for the better part of the noughties, both in AUS and in the RoW. But I underestimated the integrity of AUS’s financial and fiscal system (Although I was right about the shonkiness of the RoW’s financial affairs.)

    Of course it is early days yet. We may well have the massive property crash experienced by the US and UK. (I doubt it. Strocchi prediction: Unemployment < 10% and property slum < 20%.))

    So, unless we are last cab off the GFC rank, it looks like I will have to raise one more cheer for John Howard.

    As will Pr Q.

  21. Alanna
    February 5th, 2009 at 08:32 | #21

    Jack # 20

    The welfare system was so efficient under Howards misogynistic management one third of all families with children, headed approximately 90% by lone females, live either in or very close to poverty, with the latchkey children of these families, letting themselves in each afternoon.

    Howard was not a nice man – Im sorry. He was a patriarchal old fool who didnt mind seeing women as the property of men and who unwound feminist advance 30 years in this country and made policies for old white males as I mentioned before. When you see it first hand amongst friends and when they are asking how can the Howard government get away with this? Why do people let it happen? – You realise his plan for women was to get under the arm of the nearest male as a way to survive and that poverty is the best treatment for offspring of separated families.

    As I said before goodbye and good riddance to him and his party and if many more women were actually aware of the details of his misogynistic policies, they would have had even less votes.

  22. Tony G
    February 5th, 2009 at 09:59 | #22

    Good post Jack,

    Howard was FAR from perfect, but he does have the runs on the board for economic management.

    It is criminal how K.rudd and his mates are showing the same political dementia prevalent in NSW (hard) Labour. A policy vacuum dispersed with pissing taxpayers money up against the wall willy nilly.

    There are plenty of large infrastructure projects that already have approval that could of been instigated at the time of the last stimulus package, These projects would be started by now and already contributing to the economy as well have having reoccurring longer term benefits to the Australian economy. What we ended up with was $750million boost to retail sales in December. Whoopy-do, $10billion pissed up against the wall for a $750 million spike in retails sales in December.

    NSW clearly indicates what the ALP can do to an economy when left in charge of the till for too long. Unfortunately K.rudds short record thus far doesn’t indicate he has learned anything from NSW’s mistakes.

  23. Peter Whiteford
    February 5th, 2009 at 10:12 | #23

    Alanna

    Using a 50% of median income poverty line, the poverty rate in 2005 for Australian households with children was around 10-12% (depending on the equivalence scales used) with around 40% of these being headed by lone parents (male and female).

    Parenting payments for lone parents were increased substantially in real terms under the Howard government, because of the increases in both the Family Tax Benefit Part A and Part B, with Part B going to single income families including lone parents. The Parenting Payment Single was also indexed to wages for the first time.

    The transfer of lone parents with a youngest child seven years or over to Newstart will have had a significant negative impact on incomes of those who remain unemployed and those with low levels of part-time work, but those with younger children are still significantly better off than in 1996. (I suspect that the increases in family payments under the Howard government were sufficiently large to actually offset the losses for those who transferred from Parenting Payment to NewStart relative to 1996.)

    Also the employment rate of lone parents increased from around 43% in 1996 to 59% in 2008, which is the highest recorded employment rate for lone parents since these statistics were first collected.

  24. Tony G
    February 5th, 2009 at 10:12 | #24

    Costello said;

    “Mr Costello said recession could be avoided if the economy was managed properly.”

    “I think Australia will be deficit for the period of this government.”

  25. February 5th, 2009 at 10:13 | #25

    Jack Strocchi asked

    “That means we should be more prone to the crash than other Angloshphere countries and any crash that occurs should be deeper. So why hasnt the AUS economy crashed harder than say the UK?”

    Your reasons have some valadity Jack howeover part of this has to do with timing – we will be hit later. The UK has (compared to GDP) a much larger financial services industry and this was the area of the global economy hit hardest first. In contrast metals commodity prices and agrictulture prices were still around record highs a year ago and while they’ve fallen a lot since then the real impact of that is just starting to hit us now. Our main export industry was still booming while the UK’s was busting, we are only moving into our bust now.

    Your point about housing market and immigration is a relevant one. However, if jobs dry up here many of the skilled immigrants will go elsewhere (taking their savings home to the country they came from where it’s cheaper to live probably) and we can’t prop up the housing market with ever increasing grants forever so there’s still pain to be felt there. Clearly the pain is starting to be felt in the highly indebted commerical property area – property trusts are the biggest loosers on the stockmarket since this bust began and were down an average of 10% yesterday on the stock market. That’s even after the government has stepped in to prop up loans and unlisted trusts have frozen redemptions. Sensible steps certainly but doesn’t solve the problem that a fair bit of past profits were illusionary, debts are too high and asset values are coming down. Again another big area of weakness in the economy in the coming years.

    So basically in addition to the ponts Jack Strocchi makes – the impact on Australia has been delayed by our mix of industries. Then this impact has been reduced further by stimulus packages, gov guarantees of banks lending etc which has been reasonably effective because the government had the benefit of seeing what happened in other countires earlier and learnign from it. Furthermore in 2007 and the first half of 2008 we had relatively tight fiscal policy compared to the UK, US etc so we had more room to cut rates and this also has had a significant impact and continues to do so.

    Cheers
    Steve van Emmerik

  26. Chris Warren
    February 5th, 2009 at 10:30 | #26

    If jack strocci (#20) is going to talk about the

    Howard-Costello model of political economy

    then he also needs to mention the vast transfer of share from wages, salaries and supplements, to Gross Oper. Surplus.

    He also needs to mention the Howard increased vulnerability to GFC due to various free trade agreements and WTO participation. The ASX follows almost slavishly the DOW.

    Our stockmarket, and pensioner incomes have been ruined – and further deperation is foreshadowed despite strocci’s points 1 to 4.

    The basis of Howard-Costello was to reduce Australian working conditions to provide for stocci’s points 3 to 4.

    The funny thing is that Swan and Tanner (and Latham earlier) want to do the same.

    2 is speculative and contingent on population increase.

    1 is just common sense and not derived from Howard-Costello in particular. Such APRA regulation is contary to core Liberal ideology.

    So it isn’t just Howard and Costello, its the agenda of the whole bloody lot – right-wing Labor and merchant bankers included.

  27. February 5th, 2009 at 10:55 | #27

    # 21 Alanna Says: February 5th, 2009 at 8:32 am

    Howard was not a nice man – Im sorry. He was a patriarchal old fool who didnt mind seeing women as the property of men and who unwound feminist advance 30 years in this country and made policies for old white males as I mentioned before.

    We can agree that Howard was in every way “not a nice man…misogynist…patriarchal old fool” and so on. Perhaps he could have been less skinflinted to single mothers. (At least he was generous to coupled mothers!) However, since I am one of those “old[er] white males” who largely share the bigoted and vindictive cultural world-view of the former PM, I cannot bring myself to pile onto him just yet.

    My argument is about macro-economics of housing finance, not the micro-sociology of benefit distribution. Howard-Costello’s immigration-financial policy, largely re-inforced by Rudd, appears to have dodged the GFC bullet, so far.

    Pr Q and Steve Keen suggest that the biggest risk factor for susceptitibility to infection by the GFC “depended mostly on the ratio of banking sector assets and liabilities to national income”. This private debt-GDP ratio graph gives some indication of AUS’s massive indebtedness.

    AUS fairly closely tracks the indebtedness of the USA. On this measure AUS’s financial industry should be in a state of massive collapse. Yet we are not. In fact our banks have leapt into the top rankings of financial institutions.

    Also our mineral export earnings have taken a big hit given the slump in demand from the PRC. This further reduces our ability to service foreign debt which makes the likelihood of forced asset sales and market value slumps more likely.

    Yet the USA and UK has crashed whilst we have not – yet. What gives?

    I suggest that there is something about Howard-Costello’s financial and fiscal policy that has kept our assets solvent, even as we suffer reduced liguidity. It looks like we have had both higher quality providers of finance (regulated banks) and higher quality and quantity servicers of finance (tax-privileged boomer investors, skilled immigrant renters).

    It is the massive excess-demand for housing which is keeping the earnings of this sector buoyant. And this massive excess-demand is being driven by HOward’s post-2001 doubling of the immigration rate, mainly high-IQ immigrants from Southern and Eastern Asia. They tend to be good payers and good citizens.

    This good serviceability of new immigrant tenants, and Howard’s tax-privileged up-trading affluent boomers, has underpinned the value of our mortgages. Which has meant that AUS banks, though heavily sold down during the crash, are not in the “toxic asset” class like the banks in the USA and UK.

    Also Costello established APRA in the aftermath of the Wallis report into the financial industry. Many of the reccommendations of this report have been implemented by Costello and the RBA which seem to have prevented our banks from engaging in the risky schemes cooked up in the City and Wall Street. A case of once bitten twice shy after the entrepreneurs party in the eighties-nineties.

    Also, Howard-Costello deserve credit for strengthening the fiscal and financial position of the Commonwealth through their stewardship. The tax base was broadened by the GST and the debt load was lightened by surpluses used to amortise debt.

    All this has put Rudd’s government in a good position to sandbag our economy with massive handouts to borrowers and massive guarantees to lenders. Rudd has also re-doubled the immigration rate to put an even stronger upward demand pressure on scarce accommodation. So long as rents stay high mortgages will be serviced.

    If unemployment stays well below 10%, a reasonable likelihood given the scale of the series of stimuli, then it is likely that we will escape the worst of the GFC. This means giving some real credit to Howard-Costello – which is anathema to the Howard-haters. But lifes like that.

    Strocchi prediction 12-24 months:
    unemployment < 10%
    housing price slump < 20%

  28. Alanna
    February 5th, 2009 at 11:20 | #28

    Jack# says
    “My argument is about macro-economics of housing finance, not the micro-sociology of benefit distribution”.

    Jack when the macro-economics of housing finance is rendering one third of all families with children to next to no access to the housing market except as renters and likely on benefits, my concern IS very much with the micro sociology of benefit distribution. In fact you hit it one.

    And yes Jack JH was generous to partnered families and partnered women – many who didnt need it.

    So I will happily pile on that mean spirited nasty old misogynist JH because of the number of kids involved here. I have no objection whatsoever to your being an old white male Jack but you might look at it differently if you had to support a daughter with three kids under 6 whose hopeless husband has avoided all responsibilit, pays the grand total of $20 a week for their upkeep (and you had to open your house and wallet to your daughter and now help raise them – like my grocer who is an older white male, self employed, small businessman and was saving for his “peaceful” retirement?).

    I could even suggest that growing household debt and the inequitable distribution of growth under neo liberal policies may actually have contributed to economic stress and family breakdown at household level but I dont think anyone is even looking at that.

    They should. The country supposedly needs more children. This is no way to go about it.

  29. smiths
    February 5th, 2009 at 11:22 | #29

    global? no, no, no

    Mike Davies, the communications director at the international accounting firm PwC, who has been deployed to Mumbai to help the local firm through this crisis, sought to make clear the distinction between the global group and local affiliates…

    “There isn’t such a thing as a global firm,” Davies says. “We are a membership organization.” The individual country firms, he says, “are not collected legally in terms of ownership. Each firm is owned separately in their own country by their local partners.”

    globalised? no not us, at the moment, until it suits us again…

    scums

  30. February 5th, 2009 at 11:26 | #30

    Pr Q says:

    Finally, there’s the question of the extent to which social democratic systems will soften the impact of the crisis on households.

    most of the richest countries have been able to finance bailouts of various kinds.

    Perhaps the biggest myth about the Howard government, one assiduously propagated by Rudd, is that is was composed of neo-liberal ideologues bent on dismantling the welfare state and slashing taxes. I refuted this myth nearly six years ago, but it dies hard.

    In fact most of the time Howard was a Big Government conservative social democrat. He enlarged the welfare state, pioneering the targetted hand-out system which Rudd is now utilising to good policy and political effect.

    Howard-Costello also left the Commonewealth finances in good standing, with a much broadened and raised tax base through the GST. Also, through surpluses and asset sales, it paid off a lot of debt (not always on the best terms.)

    So the Rudd govt is now in the position of being able to hand out masses of largesse courtesy of fairly full Treasury coffers.

    To summarise: Howard-Costello put Australia to the:

    - Financial Right on the private bank debt/GDP scale

    - Fiscal Left on the social democrat/neo-liberal scale

    But through a combination of good financial governance and massive influxes of credit-worthy immigrants, this appears to have done the trick, so far.

  31. Alanna
    February 5th, 2009 at 11:31 | #31

    Ill even give you an example of bad policy (state – this one). The back to school $50 allowance that was handed to all and sundry. $50 is real help for single mothers who might really need it to pay eg an electricity bill, but the same cheque is likely to sit in some idly in some wealthier mother’s purse for months because to her its so small she forgets it even arrived in the mail.

  32. Chris Warren
    February 5th, 2009 at 11:36 | #32

    Its always good to see people putting numbers where their mouth is:

    Strocchi prediction 12-24 months:
    unemployment < 10%
    housing price slump < 20%

    The fact that Strocchi is using such high ceilings undermines his approach.

    Unemployment of 9.5% and housing price slump of 15% will still represent Australia experiencing the worst of the GFC.

    I cannot predict so far out as no-one has ever successfully predicted exchange rates – the real lever on our economy.

    Housing rents are paid by wages, so the wheel is still in spin – so to speak. The vast flow of international students may be contributing to a lot of housing problems (just a guess). So I would want more detail on what Strocci means by:

    Rudd has also re-doubled the immigration rate to put an even stronger upward demand pressure on scarce accommodation.

    Maybe rents are high because housing was built and costs using debt. Tennants must service landlords debts. Why can we have such wonderful Wallis-like regulation placed onto landlords?

  33. Tony G
    February 5th, 2009 at 11:38 | #33

    Alanna siad

    “They should. The country supposedly needs more children. This is no way to go about it.”

    The best way to encourage more children and get the fathers to pay for them is to make each child tax deductable. This might encourage them to get a job, where as handouts do not.

    Encouraging teenagers to go out and get pregnant so they can get an increase in pension is not the way to go about it.

  34. Alanna
    February 5th, 2009 at 11:42 | #34

    Trust Tony G # 33

    “Encouraging teenagers to go out and get pregnant so they can get an increase in pension is not the way to go about it.”

    Tony G are you saying one third of all families with children are the result of teenagers going out to get pregnant with a view to getting benefits?

    Look at the real world Tony – not the latest quadrant articles. Making children tax deductible for fathers?

    Well thats fine. Id advise all mothers to leave the children on the fathers doorstep in that case. Your policy wouldnt last two seconds.

  35. Tony G
    February 5th, 2009 at 12:17 | #35

    “Look at the real world Tony”

    I know of actual people in the ‘real world’ Alanna with several kids who find it financially convenient to separate so they can maximise their benefits, housing subsidy etc. etc. There is plenty of financial incentive to do so and the practice is pretty wide spread. With today’s technology nobody is forced to have children, people have a choice, so they shouldn’t expect someone else to shoulder the costs for their decisions.

  36. Ikonoclast
    February 5th, 2009 at 12:25 | #36

    Howard and Costello were very poor economic managers. Presiding over surpluses in boom times is as easy as falling off a log. Doing something useful with that good fortune takes real humanity and true imaginative intelligence, qualities sadly lacking in that pair.

    What we have to ask is what did they do with the surpluses? Did they invest in hospitals, education, human services, transport infrastructure, communications infrastructure, energy infrastructure, renewables energy and so on? The answers are seven time “No”.

    The states were starved of funds. The so-called “generosity” of the GST handout to the states was a deception. Federal handouts to the states did not match GDP growth and they did not match the real costs growth in the health sector and other sectors.

    Instead Howard “paid off debt”. But if one sells an income producing public asset (say Telstra) which is servicing all its debt AND making a tidy profit then one is no better off and indeed one may be worse off. Not only is the debt gone but the asset and the income stream is gone too. But then Costello always was totally mendacious mediocrity.

    Presumably, since we had surpluses there was no need to firesale Telstra, CSL etc etc in a blanket Federal/State divestment of government assets which saw $100 billion of assets sold for about $50 billion. In other words there was a $50 billion dollar wealth transfer from the public domain to (in the main) a small sub-set of rich people and corporations.

    All that this did, along with the excessive easy availablity of debt was to inflate our massive asset bubble. Much of the “wealth generation” of the Howard era was of this illusory kind. Now this notional wealth is disappearing like the smoke and mirrors it was in the recession/depression made inevitable by the massive and sustainable debt overhang.

    Howard’s legacy is a dilapidated and decrepit infrastructure, poor education system, poor health system and an out of control boom with lopsided asset prices which must now collapse. Howard isn’t totally repsonsible for our debt overhang. It’s been growing since the 1960s. However, Howard’s policies supercharged an already overheating assets prices system.

    A final word about government deficits. It is simplistic in the extreme to say “Surpluses good, deficits bad”. Counter-cyclical considerations require surpluses in boom times and deficits in recessionary times.

    Nor is it virtuous to run surpluses when people are needy or are made needy by the surpluses policy. I could run a large surplus in my household if I fed my kids bread and water, sent them to school barefoot with no textbooks, denied them medical and dental treatment and banned all extra-curricular sports, activities and entertainments. I would be saving for some hypothetical exigency in the future while failing to meet present need.

    That is exactly what Howard did to the nation and it constitutes economic and human management of the worst kind. Howard and Costello’s “great economic management” is a shabby myth.

  37. Ikonoclast
    February 5th, 2009 at 12:27 | #37

    Correction, that should have been “UNsustainable debt overhang”.

  38. carbonsink
    February 5th, 2009 at 12:36 | #38

    AUS fairly closely tracks the indebtedness of the USA. On this measure AUS’s financial industry should be in a state of massive collapse. Yet we are not. In fact our banks have leapt into the top rankings of financial institutions.

    Yet the USA and UK has crashed whilst we have not – yet. What gives?

    Is it possible its just a matter of timing?

    Australia has been able to delay the onset of the recession because we had a large government surplus going into this, and export income held up for a while due to contract prices negotiated at the height of the boom, and a very rapid fall in the Australian dollar.

    The surplus has now evaporated, and contracts for our exports will have to be renegotiated at post-GFC prices very soon.

  39. sdfc
    February 5th, 2009 at 12:59 | #39

    Jack,

    The terms of trade was still rising into the end of last year, as this has been the major source of our wealth over the past few years, it is a little early to say we have skirted the worst of the crisis. Our banks and economy won’t come under real pressure until this income begins to dry up, and the unemployment rate starts to rise in a meaningful way. Both these events will have an impact this year, my guess is sooner rather than later.

  40. Ikonoclast
    February 5th, 2009 at 13:06 | #40

    Carbonsink! Yes, we will crash. It’s only a matter of time. Have a look at Steven Keen’s debtwatch site and his utube “The merciless exponential debt explotion” (sic).

    Our crash should not destroy our big four banks (in the mid term anyway). Their balance sheets are bit sounder than were those Lehman Bros (I think) plus they have the govt guarnatee.

    However, mass mortgage defaults and mass unemployment in the vicinity of 10% to 20% are on the way.

    The current debt levels are unsustainable. What happens what an unsustainable financial position meets an an unsustainable climate, resources and energy position? Think global trainwreck on an unimaginable scale. That’s where we are headed.

  41. Alanna
    February 5th, 2009 at 13:41 | #41

    TonyG#35 says
    “With today’s technology nobody is forced to have children, people have a choice, so they shouldn’t expect someone else to shoulder the costs for their decisions.”

    That would be fine Tony if white male designed policy didnt unjustly and harshly penalise women and provide incentives for men to reduce their payments and shift the costs of raising children in separated households to female parents. Howards policies are a misogynistic disgrace and its the kids who bear the brun of it – too many kids to think about. If males from s else would have to shoulder the costs. The evidence is all there – backlogs of owed maintenance even at the paltry amount many men get away with.

    As I said before, the selfish response, of yours above does nothing to redress the imbalance and perpetuates myths. Its down to individual choice but one sex has generous leeway to abrogate from the financial responsibility arising from their joint decision to have children.

    As I suggested Tony, women need to get smart about this and deliver primary care to males (give them the children for the majority of the care). Then we might just see some decent childcare initiatives but currently, under the law, the vast majority get to pay a pathetic amount each week and walk away.

    It is a sad reflection on our society that extreme selfishness (along with misogynistic policy) has been allowed to predominate and it was your little mate JH that presided over this ugly policy direction.

    Im amazed JH didnt just come out and legislate that it is “females choice to have children and no one else should have to pay for them.”

    Its entirely in character.

  42. Smiley
    February 5th, 2009 at 14:19 | #42

    Jack Strocchi said:

    Of course it is early days yet. We may well have the massive property crash experienced by the US and UK. (I doubt it. Strocchi prediction: Unemployment < 10% and property slum < 20%.))

    Sorry if someone has already made this point, but won’t that make us less competitive with the rest of the world Jack? If young people in Australia have to pay higher prices for their housing, won’t this put a lower limit on their income. Or to put it another way, won’t young people in places where property is not over-valued be able to compete in the world market better than young Australians?

  43. Monkey’s Uncle
    February 5th, 2009 at 15:19 | #43

    Smiley, it’s true that having an overvalued property market imposes costs and disadvantages on some sections of the community.

    But having created an asset bubble, it can’t just be burst overnight without creating large economic damage elsewhere (negative equity, more foreclosures, etc.). Any fall in house values will need to be modest, not severe, unless we want more economic damage elsewhere.

    Also, if younger generations have to work more to be able to afford a home, well then I guess they are still keeping the economy going. Someone has to stay on the treadmill, after all.

  44. February 5th, 2009 at 15:28 | #44

    # Chris Warren Says: February 5th, 2009 at 11:36 am

    The fact that Strocchi is using such high ceilings undermines his approach.
    Unemployment of 9.5% and housing price slump of 15% will still represent Australia experiencing the worst of the GFC.

    I am playing it a little safe since it is early days. But I definitely see AUS as coming in on the lower-bound of GFC hits. This is in contradiction to my earlier predictions (made throughout the mid-noughties) and in contradiction to the Quiggin-Keen view.

    A 20% haircut on property prices would put us back to the early noughties in property values. Not exactly the poor-house. It would more or less dissipate the froth from the last-minute bout of asset-price inflation that took hold as boomers borrowed and brought up big to tip assets into their tax-privileged super funds c 30 JUN 2006.

    Single figure unemployment is still recession territory. A Depression is characterised by bankrupted financial institutions, a credit drought and double digit unemployment. This describes much of the prospects for many parts of the USA and USE.

    I would think that most policy makers the world over would probably take my predicted result if they could get it locked in now. It at least implies no worse than a bad recession, but not a Depression. It also implies that no big bailouts or nationalisations of financial institutions will take place. A possibility already conceded as likely by Pr Q.

    In itself that should justify Costello taking a bow.

    Chris Warren says:

    I cannot predict so far out as no-one has ever successfully predicted exchange rates – the real lever on our economy.

    Housing rents are paid by wages, so the wheel is still in spin – so to speak. The vast flow of international students may be contributing to a lot of housing problems (just a guess). So I would want more detail on what Strocci means by:

    Rudd has also re-doubled the immigration rate to put an even stronger upward demand pressure on scarce accommodation.

    Maybe rents are high because housing was built and costs using debt. Tennants must service landlords debts. Why can we have such wonderful Wallis-like regulation placed onto landlords?

    THe AUD bounces around alot, usually .70c +/-20c. This follows from dependence on flunctuating commodity prices, international capital flows and domestic interest rates.

    We may be in for a second round of AUD devaluations once our short-term mineral contracts get re-negotiated. Same deal once the roll-over of short-term debt hits sometime this quarter. It is unlikely that we will continue to borrow so much with a higher interest rate.

    Overall our declining AUD has served us well in the past. We scraped through the Asia crisis in 1998 courtesy of a big devaluation. It will serve the same function this year by making our minerals more saleable. Another reason for optimism.

    Rents are not high because of debt-finance. The rise in rent is driven by demand-price, not supply-cost, pressures.

    Housing prices/rents movements will always be correlated as the capital value is imputed by its rental income earning potential. Usually by a factor related to the prevailing real rate of interests (which in AUS hovers around 5%.)

    The immigration rates has been doubled and re-doubled over the past decade, effectively creating a bottleneck for handy metro properties. In the late nineties immigration was running at about 80,000 pa. Post-Tampa Howard cranked it up to 170,000. Rudd is pushing it close to 300,000.

    But the housing stock is growing, if at all, at incremental rates. The post-Tampa immigration influx is why metro rents started to push upwards in the early noughties. (And not surprisingly that is the moment when labours share of national income started to shrink.)

    The increased earning power of AUS residential property is the reason why we seem to have escaped bank crashes. Our mortgages are blue-chip relative to the RoW. Everyone works 24/7 to pay em off, or the increased rent on rented investment properties.

    There will be no regulation of landlords. Far from it, this breed is the chosen saviour of our race and has been showered with tax-privileges (negative gearing and capital gains concessions) and now free insulation!

    Of course the advent of mass unemployment > 10% would probably send immigrants packing and cause the whole rat race to run in reverse. The AUS would probably reach the upper-bound of GFC hits.

    But I expect that Rudd will and is doing everything to avoid this possibility. He is certainly spending Costello’s legacy like there is no tomorrow.

  45. Alanna
    February 5th, 2009 at 15:36 | #45

    An overinflated housing market does no one any good.

    It especially doesnt do youth any good given they have to add to household debt to be able to buy it and if they cant afford to maintain it or cant get a job, it will reduce future demand anyway.

    Sooner or later??…should it deflate with a bang or a hiss or plateau and sink slowly for a few years (my bets on the latter)?

    We have too much invested in private housing and not enough in other forms of production. It has similarities to the US, borrow to buy the house, borrow to fill it up with furniture, borrow against it to enter the sharemarket or investment properties but borrow we did (in many cases so people didnt miss the train and still many missed it anyway).

  46. February 5th, 2009 at 15:54 | #46

    # 36 Ikonoclast Says: February 5th, 2009 at 12:25 pm

    Howard and Costello were very poor economic managers. Presiding over surpluses in boom times is as easy as falling off a log.

    What we have to ask is what did they do with the surpluses? Did they invest in hospitals, education, human services, transport infrastructure, communications infrastructure, energy infrastructure, renewables energy and so on? The answers are seven time “No”.

    Instead Howard “paid off debt”. But if one sells an income producing public asset (say Telstra) which is servicing all its debt AND making a tidy profit then one is no better off and indeed one may be worse off. Not only is the debt gone but the asset and the income stream is gone too.

    Howard isn’t totally repsonsible for our debt overhang. It’s been growing since the 1960s. However, Howard’s policies supercharged an already overheating assets prices system.

    Howard and Costello’s “great economic management” is a shabby myth.

    I tend to agree with most of what Iconoclast’s arguments. But this argument is about Howard-Costello as financial regulators, rather than as economic managers. Finance measures nominal performance that can be cashed in right now. Economics measures real performance which tends to come home to roost at a later date.

    I too opposed the Telstra sale. And would have liked to see more federal spending on industrial infrastructure and community services.

    I am also appalled at the unproductive, debt-driven speculation on real estate. And its associated affluenza as people used the increased equity in their homes as an ATM to finance splurges on luxury goods.

    In fact, applying his position is why I predicted a massive bust to our asset price bubble. This prediction has failed to materialise. I was wrong about AUS’s finance. Although it turns out I was right about the RoW.

    Our asset prices as a whole have grown at above post-War trends under their stewardship. And household debt, whilst staggeringly high, is still manageable given the current higher rental and lower interest rates. That is why our banks appear to be reasonably solid, so far.

    Howard-Costello did a poor job in managing real economic resources. The massive rates of immigration introduced under Howard are beneficial to most adoptive citizens, slumlords and sweathoppers. But they are harmful to most native citizens.

    Obviously this influx increases our greenhouse gas emissions forcing us to make much more politically painful per capita cuts in the future.

    Massive population growth is pushing our water, energy and arable land stocks to the brink. It also increases queues and shortages for all forms of public infrastructure – traffic jams, public transport, health, education etc.

    So yes, Howard-Costello were lousy managers of the economic and ecologic resources. But they have so far got a good pass on financial and fiscal measures.

  47. February 5th, 2009 at 16:50 | #47

    # 38 carbonsink Says: February 5th, 2009 at 12:36 pm

    Is it possible its just a matter of timing?

    Australia has been able to delay the onset of the recession because we had a large government surplus going into this, and export income held up for a while due to contract prices negotiated at the height of the boom, and a very rapid fall in the Australian dollar.

    The surplus has now evaporated, and contracts for our exports will have to be renegotiated at post-GFC prices very soon.

    Yes, timing is critical. And we have not yet faced our greatest test. But I predict we will pass it, with a bit of good luck and good management.

    Over the next six months AUS economic managers must re-negotiate prices on mineral exports and capital imports. AUS sells alot of minerals to NE Asia at premium prices. And it borrows alot of capital from NE Asia at rock-bottom interest rates. So alot is at stake.

    But right now it looks like the demand for our minerals is going to take a massive dive. And the supply of capital must surely dry up a bit as Asian states turn towards internal debt-driven development.

    This article indicates that the PRC is willing to play hard ball in driving down mineral prices if it gets the chance. That was at the height of the boom. Now we are in bust times so I guess the PRC et al will drive a hard bargain.

    But they still need alot of stuff to go on with internal development in order to forestall political unrest. (Which I predict that the CCP will adapt to and co-opt,) So that well will not run dry.

    AUS banks must also roll over a mountain of short-term foreign debt over the next six months. This is the danger period. David Uren of the Australian assesses the risks of a foreign credit squeeze for the commercial property market and bank solvency:

    THE withdrawal of credit to Australia by foreign banks is the greatest threat facing the economy in the year ahead. The slide in business lending in December, which the Reserve Bank attributed to lower foreign currency lending, is a harbinger of things to come.

    Australia’s non-financial corporations owe $95 billion to foreign lenders, while the banks and other financial institutions owe $813 billion. About $500 billion is short term, most having to be rolled over every 90 days or less.

    The International Monetary Fund believes rollover risk forms part of what it calls the “pernicious circle” that connects the financial crisis to the real economy. It sees the choking of credit markets becoming increasingly acute over the coming year.

    The IMF highlighted the role of tumbling US commercial property markets in raising its estimate of impaired banking assets from $US1.4 trillion in October to $US2.2 trillion ($3.45 trillion) now.

    With turnover in commercial property having come to a virtual standstill, the Government believes forced sales resulting from the withdrawal of foreign lenders would result in a rapid and disorderly fall in property prices.

    That adjustment would not be easily accomplished, given the hostile state of capital markets,

    I am not so bearish now about AUS banks. Thanks to a tighter regulatory regime it does not look like there are alot of Skase’s, Bonds and Connells out there cooking up dodgy commercial property deals leaving cavernous dirt holes in the middle of the CBD. Uren concludes on a hopeful note:

    Australia’s banks are in better shape than those of any other nation.

    Australia’s banks are less vulnerable to a disorderly fall in commercial property prices, and the property market itself is less vulnerable to a disorderly collapse now than was the case in 1990-2.

    UBS property analyst John Freedman says markets were awash with projects being built when the recession hit in the 1990s. “There were a lot of development assets where no income was being paid, hence no interest was being paid and there was no prospect of getting tenants, and this meant creditors liquidated sooner rather than later, and caused huge value losses across markets.”

    Australia does not have the over-building of commercial property that has contributed to big property falls in London, while leverage has typically been lower in Australia than in Britain, where commercial properties were geared to 80 or 90 per cent.

    “The big question for us is, will it be a softer outcome, or are we just six months behind them? Our fundamentals are better. The thing to watch is the banks and how secure their capital base is,” Freedman says.

    “The health of the property sector depends on the health of the banks, rather than the other way around.”

    Also Rudd is doing a great job by way of fiscal handouts and financial guarantees. Largely building on the solid institutional base left to him by Howard-Costello.

    SO I am going to stand by my prediction that AUS will escape the worst of the GFC, despite its massive indebtedness. Some credit for this should go to Howard-Costello.

  48. Michael of Summer Hill
    February 5th, 2009 at 17:17 | #48

    John, if the latest data coming out of China is correct, Chiness manufacturing is on the upper and the economy is slowly bottoming out of the slump.

  49. smiths
    February 5th, 2009 at 17:39 | #49

    ahh, michael, some light relief, cheers

  50. February 5th, 2009 at 17:42 | #50

    # 39 sdfc Says: February 5th, 2009 at 12:59 pm

    Jack,

    The terms of trade was still rising into the end of last year, as this has been the major source of our wealth over the past few years, it is a little early to say we have skirted the worst of the crisis. Our banks and economy won’t come under real pressure until this income begins to dry up, and the unemployment rate starts to rise in a meaningful way. Both these events will have an impact this year, my guess is sooner rather than later.

    Mineral price contract renegotiation is the other prong of the fork which the AUS economy may well impale itself on over the next year. (The first prong is foreign debt roll-overs.)

    I have skirted around Terms of Trade issues since I know very little about resource economics. Fortunately the indispensable David Uren has come to the rescue with a very timely summary of AUS’s situation.

    THE government’s biggest concern about the economy is that commodity prices will fall further and faster than expected.

    The Reserve Bank has been keeping an index of Australia’s commodity prices since 1982. For a 15 year period, from 1985 to 2000, the index hovered around 80 points, rising at most 10 per cent above that level during the mini-commodities boom in 1989-90.

    In the eight years since then, the RBA commodity index has risen threefold to 234 index points. It doubled in the last three years alone.

    the increase in commodity prices…ran from 2003 to June 2008. The terms of trade reached a peak in 1974 that was 31 per cent above the long-term average. By contrast, in June this year, the peak in the terms of trade was 60 per cent above the long-term average.

    Treasury’s budget update last month tipped that the terms of trade (the ratio of export prices to import prices) would show a rise of 10.75 per cent this year, reflecting the boom-time iron ore and coal contracts won last April. It forecast a partial reversal of 8.5 per cent in 2009-10.

    Treasury was aware, when it compiled its mid-year budget update that commodity prices were the greatest vulnerability. It included a useful ready reckoner, with modelling showing that a 4 per cent fall in the terms of trade would, given constant exchange rates, result in a 1 per cent fall in nominal GDP and a $1.5 billion drop in budget revenue in the first year and a $3.8 billion fall in the second year.

    Given the precedent of 1974 and the stratospheric height commodity prices reached earlier this year, it is possible the fall in the terms of trade in 2009-10 could be at least double the 8.5 per cent projected by Treasury last month.

    Commodity prices are still likely to fall in the short-term as the hard-noses in the PRC re-negotiate contracts with an eye to their bottom line. So we are in for some pain, especially in the resource rich states WA and QLD.

    Commodity prices have already fallen a long way. The spot price for iron ore has come down from a peak of $US200 a tonne in February this year to about $US70 now. The current spot price is less than half the benchmark price for Australian iron ore of $US144.70 a tonne.

    Australia’s big iron ore mines still have cash costs of little more than $US40 a tonne and will remain profitable, although not sinfully so, under any likely scenario.

    If a four per cent fall in ToT results in a one percent drop in nominal GDP then a 17%+ terms of trade contemplated by Uren would give a four per cent hit to GDP. Assuming constant exchange rates.

    I assume that our AUD would fall to adjust to our lower international purchasing power. Still, a four per cent hit to GDP is no joke. That would wipe out all normal growth on its own and leave us with negative growth.

    Hence the need for a stimulus package in the order of five per cent of GDP. Which appears to be what Rudd is aiming for ($10 bill = $40 bill).

    So the fiscal stimulus package is really just covering the ToT hit. Whilst the financial guarantees to banks are covering the roll-over risk.

    Full marks to Rudd for covering the two main dangers!

    Thanks to those who have responded so fairly and reasonably to my lengthy comments. And thanks to Pr Q whose charitable interpretation of moderation rules has let them through, despite my occasional grumpy or chest-thumpy outbursts.

  51. Alanna
    February 5th, 2009 at 17:49 | #51

    Jack#47
    Finance and fiscal alone wont deal with the problems Australia has that have been incrementally accummulating since the 1970s.
    What point is assessing JHs government as good fiscal or financial managers (hello? Am I hearing you right? We have just had the biggest GFC and the financial sector has been decimated. I dont care where the problem started – what exactly did Howard do to reign in the financial gambling that went on here over the last decade? To my recollection he praised it as evidence of individual entrepreneurrial success stories whilst the greed abd excess built to a crescendo and smashed the financial markets into a brick wall).

    In short he had his foot right off the brakes and I dont see how that makes for good financial management. As for the fiscal side of things – he starved the states and local governments when we had surpluses (leaving the mess of public hospitals and transport failings for the ordinary person to bear), he starved welfare where it was needed and gave it where it wasnt and he did not invest adequately in long term infrastructure because he was so ideologically driven to strip public ownership (and Telstra is a disaster of the first order).

    He was a dogged short term man with a dogged short term miserly view.

    I can barely imagine that people in here would be fool enough to consider JH either a good financial or fiscal manager.

  52. Smiley
    February 5th, 2009 at 19:09 | #52

    But having created an asset bubble…

    he said nonchalantly, as if Mr Nobody was to blame… Sorry I couldn’t resist.

    Any fall in house values will need to be modest, not severe, unless we want more economic damage elsewhere.

    Yes that is the paradox we’re in. High housing prices will only encourage inflation as those who can work will attempt to recoup the costs. As far as I see it there are only two ways this could end. Deflation or inflation. Either way, those who thought they could fund their retirements off the housing bubble may get a rude shock. And I’m betting on deflation, no matter how hard the government or RE industry try to fight it.

  53. Alanna
    February 5th, 2009 at 19:17 | #53

    Peter Whitehead#23
    said (and thankyou for the info)

    “Using a 50% of median income poverty line, the poverty rate in 2005 for Australian households with children was around 10-12% (depending on the equivalence scales used) with around 40% of these being headed by lone parents (male and female).

    Parenting payments for lone parents were increased substantially in real terms under the Howard government, because of the increases in both the Family Tax Benefit Part A and Part B, with Part B going to single income families including lone parents. The Parenting Payment Single was also indexed to wages for the first time.”

    My reply;

    The male and female is still in the vast majority female Peter. It depends on the equivalence scale – correct. However I would add that Centrelink offers very little assistance to chase up income hiding (often self employed) males to contribute their proper responsibilities.

    I also think that I would rather have the attitudes of the past prevail when it comes to the social benefits of raising children…Menzies noted it as form of national service and so it is. What too many of those who measure success by employment dont count is the productive contribution of childraising (not even getting a mention in GDP) and the detrimental effect of parental absence and even exhaustion due to the burden being primarily carried by a sole parent.

    Some respect for the role of raising children (and the sheer effort and time involved) would not go astray by social policy makers. In addition burdening sole parents with a choice between extreme hardship or poorly paid employment is not tackling the problem as they do in European Countries. You can achieve a very high participation rate in sole parents by providing government run and heavily subsidised childcare (Now this would be a useful fiscal stimulus as well) and instead we leave childcare to the typical Australian scoundrels like Eddy Groves and let sole mothers (and I will say mostly mothers because that is the way it is) battle under extreme hardship.

    Where is the debate on this? At least make it easier for sole parents to get to work knowing their kids are being looked after. Childcare in exchange for national service. Its more than fair but there is not even any recognition of positive initiatives like this – just put the boot in and force them to work or live in poverty no matter the effect on kids.

    Even 40% means sole parents are over represented in the poverty stats.

  54. Alanna
    February 5th, 2009 at 19:47 | #54

    Peter# 23
    Even if the rate of sole parents living in poverty is 40% of 12% = 5% of all families with children, and given that sole parent families are now about 30% of all families with children – that still means 1 in 6 sole parent families are living in poverty. Still too high. According to Elspeth McInnes (see below) 8.5 in ten children live with their mothers. House prices have risen from 4 times the average wage to 7 times over the decade to 2007 which has pushed up rents whilst federal funds have been directed to rent relief as subsidy to landlords and public housing has declined. 70.7% of single parents have an income in the two lowest quintiles compared to 25% of other families with children.45,000 families with children accessed homelessness services in Australia in 2006. The number of families with children seeking assistance has increased by 30% over the past 5 years (St Vincent de Paul 2007).

    Anyway

    The link is here

    http://www.ncsmc.org.au/main.htm

    I dont think John Howard did much of any use at all in this area whatsoever and more than that, I think “welfare to work” for sole parents was a neo liberal jack boot approach whilst he splashed our taxes around on people who really didnt need it (middle class welfare). The government could do much more that would be productive, respectful and beneficial (like decent childcare) if it was so inclined and even though we had the boom to pay for these initiatives – the coalition with its old (selfish) white male’s policies chose to ignore need and reward greed.

  55. Tony G
    February 5th, 2009 at 20:49 | #55

    Alanna @ 41 Said;

    “arising from their joint decision to have children.”

    No Alanna in todays society it is always the womans prerogative to have a child or not.

    When my daughter goes out on a date I tell her to treat it like a job interview, otherwise she won’t know what she could end up with.

  56. sdfc
    February 5th, 2009 at 21:34 | #56

    Your last comment seems to suggest Tony that in your opinion, when the father walks away from a relationship leaving women to fend for themselves and their children, hiding income in some (too many) cases so as to avoid their responsibilities, then it is the woman’s fault.

  57. Alanna
    February 6th, 2009 at 08:06 | #57

    55# Tony
    I would gave guessed the advice you give your daughter when she goes out on a date is all wrong (and my guess is she knows it!). When she goes out on a date tell her to treat it like hiring a potential employee.

  58. Tony G
    February 6th, 2009 at 09:37 | #58

    That’s right Alanna,

    If she is going to be in a position of HAVING to indenture someone’s service for 18 plus years, not withstanding the risks of death, disappearance or insolvency, she should conduct a reasonable due diligence to ascertain if the counter party is up to the task before she commits.

    If there is any doubt and she still wants to rear children, she should do it on the basis of being able to maintain her independence.

  59. Alanna
    February 6th, 2009 at 09:53 | #59

    Tony#59
    And there should be insurance for unforseen marital events after the children have arrived! I dont see that offered anywhere – do you?

  60. Tony G
    February 6th, 2009 at 10:38 | #60

    “[insurance] I dont see that offered anywhere – do you?”

    Alanna, have you stumbled on a business opportunity?

    On a more serious note, as you know at the best of times it is hard to raise children, let alone having to do it as a single parent. Unfortunately, I don’t see that changing any time soon, but we can live in hope. In the scheme of things we only get to borrow children for a short time and then they are gone, enjoy them while they are there.

  61. Anthony
    February 6th, 2009 at 10:45 | #61

    There are endless explanations of the causes of the GFC and myriad proposed solutions. The analysis that has made the greatest sense to me comes from Mary Kaldor of the LSE. In particular, I like her paradigm (drawn from the work of Carlota Perez) of the long waves in the history of capitalism that are a consequence of the bunching together of technological innovations. The current crisis is the end of the frenzy phase of installation of the latest surge of technological development – our own era of the age of information and telecommunications technologies.

    Kaldor says the resulting mismatch between our social and political institutions and the profound changes in society wrought by the so-called `new economy’ require a solution that goes well beyond a bank bail-out and some Keynesian pump priming.

    “The new Keynes has to be a Neo-Schumpeterian. Neo-Schumpeterianism is both supply side and demand side; it is about matching the social and institutional framework to the techno-economic paradigm. Keynes thought it was enough to dig holes within a national context if that would stimulate the economy and, indeed, that was the solution in a mass production era. But in the current era, any stimulus has to be directed towards structural sustainability on a global basis. This is Keynsian in the sense of stimulating demand but it is neo-Schumpeterian in so far as it matters how money is spent, in the insistence that any stimulus must provide a sustainable outlet for the extraordinary gains in technological know-how of the last thirty years.”

    Read the full article at http://www.opendemocracy.net/article/crisis-as-prelude-to-a-new-golden-age and I’d be really interested to see your responses.

  62. Alanna
    February 6th, 2009 at 11:15 | #62

    Tony#61
    Yes I may have stumbled on a business idea Tony (insurance for unforseen marital events after children have arrived) – however Im reluctant to offer it the idea to the insurance companies or they may lobby governments for legislation requiring wedding liability insurance up front!! Be careful what you wish for.

  63. Monkey’s Uncle
    February 6th, 2009 at 13:41 | #63

    Regarding the above mentioned poverty measurements that anyone who is on less than 50% of median income is living in poverty, measuring poverty solely in terms of income inequality is pretty meaningless.

    If you had a country with an average income of $1000 a year, then anyone on more than $500 a year would be deemed not living in poverty. If you had a country with an average income of $50,000 a year, then anyone on less than $25,000 a year would be deemed to be living in poverty.

    If a rich person gains income, then the official poverty rate rises because the average income rises. If a rich person loses income, the official poverty rate falls because the average income falls.

    Moroever, there are many reasons why income inequality tends to exaggerate the extent of real material inequality in society:
    - people’s incomes often vary across time, including short-term and long-term fluctuations. Many people spend part of their lives in higher and lower-income brackets. My income varies heavily week-to-week. Does that make me a rich capitalist pig last week, but a poor oppressed individual this week?
    - in addition, most people’s standard-of-living doesn’t vary as much as their income across time. That is because people usually do things like making major purchases or paying off a house during times of greatest earning potential, while reducing their outlays during times of lower earnings. Or people save money when their earnings are high, and draw down when their earnings are lower.
    - it also ignores a whole range of non-income social transfers, like concessions, price discrimination, charitable redistributions, expenditure on services for the poor, public housing, etc. etc.

    Measuring poverty solely in terms of income inequality is pretty useless. A more credible method of measuring poverty is to look at what percentage of people suffer multiple hardships over meeting basic needs within a short period of time (like medical care, food, housing, clothing).

    But it’s pointless debating poverty unless there is a half-way credible method of measuring it.

  64. Alanna
    February 6th, 2009 at 14:05 | #64

    Tony with inequality measures all those things you mention can be examined – but what really matters is key indicators within the measures over time (and that means decades in many cases)…..such as the rise in the p90/10 ratios which show the ratio of the top decile income earners to the lowest decile income earners…and also the number who are excluded from the measures completely (earn under the tax reporting threshold for example). Amazing things were done with newly separated females in the 1980s – disappeared from the stats..so if anything it was likely understated in that decade.

    There are many different and completely credible forms of inequality measures Tony – they do not ignore social transfers or even housing costs or other items you mentioned depending on the criteria used. The Social Policy Research centre at UNInsw and NATSEM at Canberra cover most measurements with considerable expertise and contribute to social welfare policy as they should (that is, if balanced governments choose to listen (by that I mean non ideologically driven systematically and dogmatically anti redistribution prone) – unfortunately balanced government has been a bit thin on the ground over the last decade or two in Australia.

    Redistribution policy is mainstream in Australia or we would not have progressive tax rates and social welfare and further it has been thus for many many decades and well accepted by both Labor and Liberal governments. Anti redistribution ideologies are fringe element economics in my opinion (yes the extended right view culminating in the most recent Coalition government).

    Apart from Quadrant I cant think of anyone else that wants to abandon social welfare redistribution and tax policies and Quadrant could hardly be called a big outfit even if they are excessively noisy. Oh apart from that there are the extreme right liberals who have hijacked the common sense, ethics and balance in the party.

  65. March 3rd, 2009 at 19:41 | #65

    Australian Bears, reconstructed and unreconstructed

    Over most of the noughties I, like Pr Q, was predicting some sort of financial melt-down and industrial recession based on unsustainable trends in the:

    – consumption of imported current goods, with implications of trade deficit-driven currency market collapses
    – speculation with inflowed capital funds, with implication of bad-debt driven property market collapses;

    However, despite AUS’s high-risk in these areas, the GFC has stubbornly refused to go through the formality of ruining our economy. It appears that, like Pr Q, I:

    over-estimated the severity of risk in AUS’s case
    under-estimated the severity of risk in the RoWs case.

    SO, since Jan-Feb 2009, I have curbed my inner bear. I have been predicting that AUS will not have a bad recession or a bad property price crash. Over the past couple of weeks off-line I revised my prediction that over the next 12 months:

    – unemployment rate < 8%
    – metro property prices falls < 10% off their 2006 peak

    That does not rule out a mild recession. Something like 2001. Not nearly as bad as 1991 or 1983 though.

    The signs still look pretty good. Melbourne especially hardly appears to have skipped a beat. The rate of mass sackings is relatively low. Not counting the shut down of manafacturing companies which, regrettably, had numbered days in any case. Banks are still lending at high rates. Auction clearance rates are quite high.

    Now I see this report in the style section of the Age:

    It’s been six months and a credit crisis since Australia’s most expensive facial was launched but still the ladies are booking $800 sessions of pampering at Melbourne’s Crown Spa.

    Thats not too shabby.

    I try, in the interests of intellectual honesty and transparency, to always admit when my hypotheses have been refuted or at least bruised by evidence. I am interested to know if Pr Q has formally revised his generally bearish forecasts about the AUS economy, this one as recently as mid-2008.

    [un?]sustainability of the economic model pursued by the whole English-speaking world for the last couple of decades with large trade and current account deficits and low to zero rates of household savings in traditional terms, offset by capital gains on housing and equity investments.

    Australia has followed this model even more enthusiastically than the US in some respects, and so far has not suffered any serious consequences. But a sudden loss of confidence in the US could easily spread here. I’d be a lot happier if our current account deficit was declining as a result of the mining boom. Instead, it’s now at record levels.

    There is still a glut of Asian capital swaming the worlds security markets, putting downward pressure on interest rates. Most of which would only be too glad to find a home invested in AUS’s relatively blue-chip mortgages.

    THis ocean of cheap credit is bound to shore up our banks balance sheets, which now look pretty good by comparison to RoW standards. Which means we avoid the stumbling block sending the RoWs economies down the toilet. (With the exception of PRC which I remain bullish on, both economically and politically.)

    And if so, does it not logically follow that Pr Q must revise his disdainful rating of the economic ministry of Howard-Costello? (And soften his contemptuous dismissal of Costello.)

    In 1964, Donald Horne described Australia as ‘a lucky country, run by second-rate people who share its luck’. This epigram could be applied, with equal or greater justice, to the Howard government and its term in office, particularly as regards economic policy. Sooner or later, however, this kind of luck will run out.

    I suggest it would be fairer to say that Howard-Costello had reasonable macro-eco policy settings given the national high demand for property and global low interest rates on capital. We have had:

    – higher quality providers of capital, given stricter financial regulation curbed the appearance of gigantic holes for commercial property in most CBDs.

    – higher quality servicers of capital, given lots of high-IQ immigrant eager to rent baby boomers empty nests investment properties

    AUS is in distinctly different situation from the US case, where both providers and servicers of capital essentially were of lower quality and went on a free-for-all. A “debtquity and diversity” recession, as I call it. (Which is why I am so uneager to slavishily imitate Californian trends.)

    Or are we, as Dirty Harry might put it, “still lucky, punk?”

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