Home > Economics - General, Oz Politics > Rachel Nolan on the case for privatisation

Rachel Nolan on the case for privatisation

December 2nd, 2012

During the long debate over the Bligh government’s sale of public assets, I was frustrated by the government’s refusal to mount a serious case in favour of the sales. The official argument, that the money gained from the sale of income-earning assets could be used to finance the building of schools and hospitals was such obvious nonsense that even strong advocates of privatisation like Henry Ergas were willing to sign a letter I organized pointing this out and calling for a proper debate. Now finally, former Transport Minister Rachel Nolan has given us some idea of what the government was really thinking.

Nolan has a piece in Quarterly Essay (paywalled, but there is a summary from Laura Tingle here), in which she laments that Australians “have little philosophical grasp of the (rightful) diminution of governmental power which deregulation has brought” . She retails some anecdotes of being besieged by “rent-seekers” wanting her to direct Queensland Rail in various ways[1], and complains about constituents wanting her to fix various things outside her control.

Some notable features of the piece:

* While complaining that we haven’t accepted the implications of deregulation, Nolan doesn’t acknowledge that we never asked for deregulation in the first place, nor does she present any positive case for deregulation. It’s just part of her background assumptions about the way the world works and should work

* There is no mention at all of the Global Financial Crisis and its implications. Nolan’s world view, formed in the 1990s, has been utterly unaffected by this massive failure of capitalism

* The remaining role Nolan sees for government is minimal, even by the standards of market liberal orthodoxy. She briefly mentions a “social safety net” (the preferred term of the most residualist market liberal view) but otherwise says nothing about equality, or even equality of opportunity. There’s a handwave in the direction of basic public goods, and a nod to sustainability. And implicit in the post is the assumption that all of this is already baked into the cake and that the only problem is that the voters aren’t yet willing to accept the offer they can’t refuse.

Overall, there’s nothing particularly remarkable about Nolan’s views. They are what would be expected from someone who absorbed the prevailing conventional wisdom 10-15 years ago and hasn’t reconsidered them since then. At least she does a reasonable job of articulating her position.

Looking at Nolan’s bio, it’s representative of the more able section of our political class these days – straight from university (where I assume, but don’t know, that she learned the ropes in student politics) to a couple of political advisor jobs, then into Parliament at an early age (at the time the youngest woman elected to Queensland Parliament, according to Wikipedia), and early promotion to a ministry. Particularly in Queensland, it’s natural that she went for Labor rather than LNP: more urban seats, more friendly to women and more completely dominated by career politicians.

For those of us who don’t think much of the diminution of government power that deregulation has brought, what lessons can be drawn here?

First, I think, that despite the awfulness of Campbell Newman, those of us who refused to support the Bligh government were right to do so. Only by making it clear to Labor that embracing market liberalism is a path to electoral oblivion is there any hope of pushing them to provide an alternative.

Second, Labor needs to reform itself so as to ensure that career politicians like Nolan are the exception rather than the rule. Affirmative action has done a great job in ensuring gender balance in Labor’s Parliamentary representation, to the point where this balance is probably self-sustaining. What is needed now is affirmative action for the people Labor is supposed to represent – members of working families. I’d suggest that future Labor candidates shoud be required to show a minimum requirement of five years working in paid employment (excluding political advisor and union official jobs[2]), a small business or raising children.

Third, this shows the necessity of keeping up public debate on issues of more relevance than the decades-old indiscretions of Abbott and Gillard, and at a serious philosophical level, rather than the kind of trivial Tweedledum vs Tweedledee pointscoring that dominates the news. In this respect at least, Nolan’s essay is a welcome contribution.

fn1. I met her on one occasion at an official event when the government was in office, and heard some of the same anecdotes first-hand. This is one of the rare occasions I’ve actually had such direct contact with politicians, beyond handshakes and chitchat at awards events and the like.

fn2. In the old days, this requirement wouldn’t have mattered for union officials, since almost all of them got their start working in the trade or industry whose workers they represented. These days, lots of union secretaries and presidents have never worked outside a union office. Craig Thomson (not a typical example in most respects, but with a typical career path) went straight from university to an industrial officer job.

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  1. December 2nd, 2012 at 15:14 | #1

    First, it is now very well established that the GFC was predominantly caused by bad government policy. If there is a lesson to be learnt, it’s that you should stop trusting government to run everything. If you want a list of government mistakes… the largest is probably the moral hazard in the banking system, but there’s also jingle-mail, pro-home-ownership regulation, Freddie & Fannie, distortions in the credit rating agencies, and excessive monetary expansion. You don’t fix over-regulation with more regulation!

    Second, it is absurd to the point of humour to suggest that any political party or state in Australia has been caught up in economic liberalism. Government spending continues to grow, the piles of regulations get higher every month, more prohibitions (magnetic toys) and compulsions are introduced regularly… and the government continues to take a very active interest in our private lives. We are living the anti-libertarian’s dream… and the trend is very obviously towards ever growing statism.

    We are starting to see the logical consequence of this statist dream in southern Europe, and I’m not sure people are going to like the conclusion.

    It is true — as you hint — that our slow sleep-walk towards ever larger government is broadly popular with the electorate. The politics of promising unachievable outcomes and unsustainable spending works well at the ballot box. But looking forward, this continued cycle of populist statism is taking us in a dangerous direction.

    It’s good to see some ex-politicians willing to stand up against populist positions and fight for good policy. If only more politicians did it while they were still in parliament. But I guess good policy is not a good career move in the age of populist hackery.

  2. Peter Smith
    December 2nd, 2012 at 15:53 | #2

    J.H. : “First, it is now very well established that the GFC was predominantly caused by bad government policy.” – yes, excessive liberalism and deregulation. Your point is?

  3. December 2nd, 2012 at 16:02 | #3

    First they came for the magnetic toys …

    Do you really think its a good thing selling toys that “can get stuck in the gastrointestinal walls, leading to perforations that can cause serious injury or death.” , John Humphry? Or has it been a lean year for examples of Government regulatory perfidy.

    John, not a big fan of ‘get a real job’ arguments but if it short circuits the assembly line for ambitious hacks – then well worth it.

  4. MG42
    December 2nd, 2012 at 16:13 | #4

    JH,

    I’m surprised people can still trot out the old, tired blurbs without even an instant of reflection. It’s no secret that it’s been neoliberalism all the way since the early 80′s in every developed country. Yet even so, it’s the old boogeyman of heavy government intervention to blame? You’re putting me on, surely.

  5. John Quiggin
    December 2nd, 2012 at 16:22 | #5

    Just as the world’s six remaining genuine communists* can go on saying that true communism has never been tried, John H can claim, with Ayn Rand, that capitalism is “the unknown ideal”.

    But if you really think, after Reagan, Thatcher, Howard, Greenspan etc that the world is no nearer to attaining the ideal than it ever has been, why don’t you just give up on politics and leave the rest of us to get with it?

    * I’m happy to entertain posts from the real six, pointing out the non-genuineness of other claimants.

  6. Jim Rose
    December 2nd, 2012 at 16:38 | #6

    Governments are so incompetent owners of businesses and so incapable of running a commercial process free of politics that governments cannot even sell a state owned enterprise for a good price under the full glare of the media and public at election time.

    Imagine how hopeless day to day state owned enterprise decision making is routinely well away from the public glare of an election?

    P.S. the career politicians we all hate are now inevitable because this new screening process for selecting parliamentary candidates is efficient i.e. university politics, union organiser, MP’s staffer and then candidate.

    With no working class left to speak of, do you know of any alternatives that ensure that endorsed ALP candidates are true and loyal members of the party?

    The purpose of political party internal labour markets such as university, union organiser, MP’s staffer and candidate is to screen for true quality, loyalty and groom for success. By socialising and working together, potential candidates can mutually monitor each other for their true commitment to the party’s values and aims.

    In the past, the screening process was through occupation, club, union and class memberships, and long apprenticeships on the backbenches. People are unwilling to wait now on the backbenches because alterative career opportunities are greater.

  7. Fran Barlow
    December 2nd, 2012 at 16:44 | #7

    PrQ

    Just as the world’s six remaining genuine communists* can go on saying that true communism has never been tried …

    “tried” is the wrong term here — formally correct, but misleading. You cannot “try” something for which the necessary conditions/resources do not exist. You can only “try” things that are feasible with the resources that can be assembled on the relevant timeline.

    “True commun|sm” in the Len|nist sense presumes material abundance, the dissolution of class society on a world scale, the siappearance of the wages system, the state and so forth.

    Even allowing that some of those who overturned their autocracies with such visions in mind really held them as aspirational, and were in this sense “commun|sts” the regimes that issued forth were perforce accommodations with scarcity and the hand of the dead generations. Commun|sm is a condition that will, it is built at all, be built wittingly by human beings, but long before humans get there, the humans have to do the hard work of laying the foundations.

    Nobody sets forth on a trip planning to build the car or the ship or aircraft in transit. So too, the journey to commun|sm, if it occurs, will require probably centuries of inclusive and equitable governance before those dead generations of which Marx spoke cease to impose themselves like a nightmare on the brains of the living.

    Let us build the vehicles for inclusive and equitable governance, and let the path to freedom take care of itself.

  8. rog
    December 2nd, 2012 at 17:07 | #8

    @John Humphreys “it is now very well established that the GFC was predominantly caused by bad government policy”

    Absolutely, deregulation was bad policy.

  9. Ben
    December 2nd, 2012 at 18:46 | #9

    Big picture analysis AND the view of a (temporary) insider. Great stuff, Professor.

  10. Jordan
    December 2nd, 2012 at 18:57 | #10

    @Fran Barlow
    Excellent points.
    We can only guess what such system is going to be, My guess would be a combination of mostly worker cooperatives with some socialist sectors and small helpings of capitalism and all of it operating in slightly limited free market. Varieties and combination of all systems can achieve a really sustainable system. Each of them have an intrinsic value in different sectors of the economy, not only efficiency but also in sustainability of the planet.
    Pure worker cooperative system have shown its decaying nature in example of Yugoslavia 1945-1990, but on the other hand, democracy has to extend into workplace. Otherwise, present hierarchy of capitalism will destroy itself as Marx pointed out, especially since resource limitations of the planet that recently began to show itself more forcefully, is against it.

  11. Katz
    December 2nd, 2012 at 20:04 | #11

    First, it is now very well established that the GFC was predominantly caused by bad government policy. If there is a lesson to be learnt, it’s that you should stop trusting government to run everything. If you want a list of government mistakes… the largest is probably the moral hazard in the banking system, but there’s also jingle-mail, pro-home-ownership regulation, Freddie & Fannie, distortions in the credit rating agencies, and excessive monetary expansion. You don’t fix over-regulation with more regulation!

    Even if we grant that the regulatory environment encouraged commercially irresponsible decisions, itself a debatable proposition, it is unarguable that the commercially irresponsible decisions were made by private firms, not by governments.

    By analogy, the government builds the roads but it is the reckless drivers who crash into the trees that grow beside them.

    Frankly, I’m surprised that a libertarian can argue that bankers or car drivers are incapable of rationally pursuing their own best interests.

  12. Robert Merkel
    December 2nd, 2012 at 20:45 | #12

    I thought it was an extraordinary piece, John.

    While it had the benefit of being honest, I couldn’t believe the narrowness of her ideological blinkers.

  13. SJ
    December 2nd, 2012 at 23:12 | #13

    It’s the same self-serving nonsense that Carr started spouting after the loss in NSW. Carr blamed the unions for opposing privatisation, Nolan blames the voters. It was someone else’s fault, not Labor’s fault for doing stupid unpopular stuff.

    We are now finding out what happened in NSW, that Obeid was pulling the strings, and was using the privatisation as a way of stealing stuff, at least $500 million worth for him and the mates involved.

    We might find out at some stage what was really going on in Queensland, but the level of denial involved would argue against mere stupidity. It’s likely there was something else going on.

  14. Chris Warren
    December 3rd, 2012 at 02:04 | #14

    First, it is now very well established that the GFC was predominantly caused by bad government policy.

    Ye Gods!

    Is this just a besotted cry from a miserable anarco-capitalist?

    The GFC was caused by whatever caused the ratcheting-up of general macroeconomic instability. It was not caused by debt and not caused by governments or banks.

    It was caused by the inherent contradictions of capitalism which have been camouflaged in the past. Enough to confuse several generations of economists it would seem.

  15. BilB
    December 3rd, 2012 at 06:36 | #15

    I think that it is pretty obvious now that Obeid was closet Libertarian who resolved the issue of government interference by controlling it from the inside, and set about profiteering in the most energetic way.

    I’m imagining that Obeid will be inducted into the Cattalaxy Hall of Fame and is already a poster boy for all young aspiring Libertarians.

    It is not unusual for ultra right wing ideologues to be entangled in left wing politics. While glancing around with this thought in mind I came across this

    http://www.ranker.com/list/famous-libertarians/mrporcupine

    notice the heavy presence of successful entertainers, many of whom achieve success on the back of social awareness material, but when it come to sharing…”get your hands off my money”. I would expect to find Paul Hogan on the list, nearer the bottom.

  16. JB Cairns
    December 3rd, 2012 at 06:55 | #16

    Bad government policy in that most of those companies offering sub-prime loans did not have sufficient regulation. hence ninja loans.

  17. Trev
    December 3rd, 2012 at 08:36 | #17

    “First, it is now very well established that the GFC was predominantly caused by bad government policy”.

    JH, it seems to this simple soul that governments in western democracies often create policies that are laudable in themselves but when attempting to implement them, may leave the door open to those from the private sector who will commit abuses. The so-called “pink batts affair” is a case in point. The fault of government is to be too “hands off” and to assume that private sector operators will do the right thing and follow accepted industry guidelines without adequate oversight.

    The following quote probably says it all, and comes from http://www.liberal.org.au/latest-news/2012/10/24/senate-estimates-committees-labor%E2%80%99s-waste-and-mismanagement

    “These frauds bear all the hallmarks of the infamous ‘pink batts’ affair, where installers fraudulently claimed rebates for installations that were never made”.

    Sins of omission on the part of governments ( for which read “having faith in the private sector not to abuse the system”)and those of commission on the part of private operators.

  18. December 3rd, 2012 at 10:21 | #18

    @John Humphreys

    The GFC was caused by over-regulation? Give me a break

  19. December 3rd, 2012 at 10:38 | #19

    Just about the other day I was reading how the insulation part of the stimulus cut Australia’s electricity use by roughly 200 megawatts. The writer said it had a return of about 15% and economically was one of the most successful investments ever made by the Australian government.

  20. derrida derider
    December 3rd, 2012 at 10:46 | #20

    @Jim Rose is, not for the first time, displaying his ignorance. Sensible pro-privatisation people will tell you that when “governments cannot even sell a state owned enterprise for a good price” it’s a GOOD thing – the whole aim of the exercise is not to get a good price but to get a good market.

    The easiest way to get a good price is to create a structure where the privatised assets can screw customers – by, for example, being a poorly regulated monopoly with legally enforced barriers to entry for competitors. The launch price will then reflect the prospect of extortionate profits.

    That’s why privatisations shouldn’t be done for short-term budgetary reasons rather than for long-term free market beliefs. Not that the ones done out of ideology don’t have their share of failures too – but quick fixes to dress up the books have a rotten track record. Even enthusiastic privatisers like Henry Ergas opposed what Bligh did on these grounds.

  21. JB Cairns
    December 3rd, 2012 at 11:06 | #21

    Indeed as DD says it all all about the market not the price.

    The higher the price the more likely the market is being distorted just like when Thatcher privatised British telecom.
    This was a failure and we then copied her.

  22. Sam
    December 3rd, 2012 at 11:22 | #22

    I think we should take seriously the possibility that the official reason given by Bligh (sell income generating assets to “finance” the purchase of new ones), was the real reason, at least for Bligh herself. She’s never given me any reason to believe she even understands ideas like net present value. I think a lot of people in government – and this cuts across all political parties – just don’t have enough economics training to even talk about the orthodoxies they are slave to.

  23. Ikonoclast
    December 3rd, 2012 at 14:06 | #23

    Where to begin? If Prof. J.Q. “was frustrated by the government’s refusal to mount a serious case in favour of the sales” then I was foaming at the mouth with nearly insane levels of vexation and invective. My wife has issued a stern ultimatum to me, “Watch the news in silence or don’t watch it at all.” As usual, I had the last words. “Yes, dear.”

    Overall, Prof. J.Q’s summation is spot on. I have nothing substantial to add to that. John Humphrey’s argument does not stand up to the facts. It was the lack of financial regulation that played a significant role in the GFC. There were other factors too including the inherent instability and internal contraditions of Capitalism. In that I agree with Chris Warren.

    Whenever people talk of the cost of regulation (which is true as it does carry a cost) they forget to mention the cost of the lack of regulation. Lack of regulation also carryies a cost. Regulating drivers and traffic entails a large finanacial cost to citizens and the state. However, too little regulation would almost certainly carry an even higher cost in accidents, injuries and deaths.

    The key is to find a regulatory optimum for each case and the economy overall and no doubt good economists and good actuaries can give advice on the financial modelling to use to find the regulatory optimum. In practice, the citizenry through representative democracy and other direct pressure and action, heuristically determine an approximate regulatory optimum if the governing system is properly democratic and responsive and if the citizenry are properly educated to practice citizen-craft.

    (By citizen-craft I don’t mean bricolage and basket weaving but they can be good activities too.)

  24. Ernestine Gross
    December 3rd, 2012 at 15:02 | #24

    “While complaining that we haven’t accepted the implications of deregulation, Nolan doesn’t acknowledge that we never asked for deregulation in the first place, nor does she present any positive case for deregulation”

    This is the crux of the concern of many people. The non-economist gives Economics a bad name and the politician doesn’t think like a representative of the people in a democracy.

  25. Newtownian
    December 3rd, 2012 at 15:03 | #25

    “* I’m happy to entertain posts from the real six (communists), pointing out the non-genuineness of other claimants.”

    A bit hard as the 6 I’m aware of are dead:

    Karl Marx – by definition
    Fred Engels – by definition
    The Marx brothers as evidenced by their harmonious collective activities over many decades and intellectual insight into capitalism and class society as evidenced by Duck Soup (politics), Night at the Opera (the class and legal systems) and ‘A Day at the Races’ (Casino Capitalism).

    More seriously I’ve listened in amazement to Bob Carr similarly extolling how neoliberal market/tradubg capitalism is the answer to climate change problems on the same stage as Malcolm Turnbull without a trace of irony or self doubt when the former was working for Macquarie Bank and the latter is a member of the Goldman Sachs alumni – both of which stand to benefit loads from this philosophical viewpoint of Rachel Nolan and countless others – the market Rules Ok. Funny about that.

    The concept of ‘cognitive dissonance’ or at least its absence springs to mind.

  26. Fran Barlow
    December 3rd, 2012 at 15:08 | #26

    @Newtownian

    You should probably have added Len|n and Trotsky … also dead … arguably Gramsci — again also dead. Perhaps James Robertson of the ICL — who is still alive (albeit 88 yhears old), might count. I doubt he reads this blog.

  27. Ernestine Gross
    December 3rd, 2012 at 15:11 | #27

    “We are starting to see the logical consequence of this statist dream in southern Europe” [John Humphries]

    Lets have a look what Berlusconi – a businessman and others’ man PM – has to say on this one:

    On Italy’s debt crisis

    Speaking on 13 August 2011, as he announced a raft of new austerity measures: “Our hearts are bleeding. This government had bragged that it never put its hands in the pockets of Italians but the world situation changed. We are facing the biggest global challenge.”

    But on 4 November 2011, he told a news conference at the end of a G20 summit: “The life in Italy is the life of a wealthy country: consumptions haven’t diminished, it’s hard to find seats on planes, our restaurants are full of people.”

    http://www.bbc.co.uk/news/world-europe-15642201

  28. Newtownian
    December 3rd, 2012 at 15:57 | #28

    @Fran Barlow

    I thought of Che, Mao, Rosa, Fidel, Jo, various PRK leaders and Lin Piao. But lets face it – 50 or so national experiments later whatever we might think of Thatcher Reagan and the Australian Labor Party – it just didnt work in its Victorian formulation and its worst enemy could even have been itself (Trotsky v. Stalin).

    Groucho et al.’s selection is at least more scientifically grounded – nominative determinism. As the T-short says “Je suis un Marxist – tendence Groucho”.

    Rachel Nolan’s position on the other hand seems to be part of that time honoured tradition. If you are ambitious and have rat cunning but are a bit philosophically brain dead just parrot a popular ideology and embed it in your thinking to the point where you are immune to criticism and self reflection.

    This style of (un)thinking is probably why the old socialist, emerging Green and Randian / neoliberal/business/New Labor ideologies leave me cold. Their premises can be interesting because they are often stimulating and innovative – but then their champions fall in love with the simplest concepts and become as pure/absolutist/inflexible as an old time religionist.

    I still remember (but cant be bothered reading) when Fukuyama’s ‘End of History’ came on the scene. Why did anyone give such conceptual rubbish credibility? I can only think they never heard of Heraclitus or twigged that “Everything changes and nothing remains still … and … you cannot step twice into the same stream”.

  29. Jim Rose
    December 3rd, 2012 at 16:27 | #29

    Fran, see http://delong.typepad.com/sdj/2007/03/hobsbawms_age_o.html for a 1995 book review by Brad de Long where he explains that communism was not the tragic hero of the 20th century.

    The main game of the 20th century was the establishment and consolidation of social democracy around much of the globe made up of material prosperity, political democracy, and successful creation of middle-class societies.

    this was something which communists made much harder because the other parties to assemble democratic majorities had to take several steps to the right because of them, and their subservience to Moscow.

    De Long notes that in 1995 the average American had a real standard of living higher than 999 out of every thousand Americans that were alive in 1895.

  30. Jordan
    December 3rd, 2012 at 16:51 | #30

    @Jim Rose

    De Long notes that in 1995 the average American had a real standard of living higher than 999 out of every thousand Americans that were alive in 1895.

    You can say that for communist countries too, and by far higher standard difference then in kapitalist parts. Mostly due to low levels of living standards in past century.

  31. Newtownian
    December 3rd, 2012 at 16:54 | #31

    Oh common JR. This is a Brad Delong.

    “DeLong is both a liberal in the modern American political sense and a free trade neo-liberal. He has cited Adam Smith, John Maynard Keynes, Andrei Shleifer, Milton Friedman, and Lawrence Summers (with whom he has co-authored numerous papers) as the economists who have had the greatest influence on his views.”

    Further it was composed during the triumphal era of neoliberalism and its topic is one of the last old socialist patriarchs in the form Eric Hobsbawm – whose book by the way is fantastic and not an apology for the soviets.

    Getting a balanced opinion from such a review is like getting a balanced opinion of Julia Gillard from Tony Abbot i.e. he may have some valid points – but you cant separate biased personal opinion from objectivity in such reviews.

  32. Katz
    December 3rd, 2012 at 17:52 | #32

    Depends what is meant by “real”.

    It is undoubted that Americans and Australians are vastly more in debt than they were a century ago. As long as debtors can service their debts they are entitled to feel in control of their material lives, but the GFC demonstrated the truth that the lives of millions of Americans were out of control.

    Millions of Americans now have a negative net wealth., a much higher proportion than a century ago.

  33. MG42
    December 3rd, 2012 at 17:53 | #33

    Oh and before I forget, Greece has a lot more in common with a real-world neoclassical economic regime than the RW would admit. Business and politics are tied at the hip. The effective tax rate on the very rich is extremely low. Greece does not have a (hyperinflationary! fiat!) independent currency, so the monetary base is tied to the output of the Eurozone and is analogous to a currency tied to a commodity, like, say, gold.

    The result? Capital flight, the economy stuck below output at 25%+ unemployment, and riots and destabilisation of their democracy.

  34. SJ
    December 3rd, 2012 at 20:09 | #34

    DD, who I rarely disagree with, says: “Sensible pro-privatisation people will tell you that when “governments cannot even sell a state owned enterprise for a good price” it’s a GOOD thing – the whole aim of the exercise is not to get a good price but to get a good market.”

    I utterly reject this argument insofar as it’s supposed to apply to post GFC Australia, and probably post GFC anywhere.

    Privatisation post GFC has become solely a corrupt exercise, where public interest is not a consideration at all. There are no longer, if there ever were, “sensible pro-privatisation people”.

    The political argument overseas has become something like: “It’s austerity, people, we’re doing what’s necessary, it’s for your own good, and so what if you the people get poorer in the short term, and we the politicians get richer? There ain’t

  35. SJ
    December 3rd, 2012 at 20:10 | #35

    …nothing you can do about it.

  36. Ken_L
    December 3rd, 2012 at 20:13 | #36

    @Jim Rose

    Jim do you ever pause to think whether your assertions are supported by empirical evidence? Or do you just enjoy the kabuki of exchanging familiar positions like old men in a retirement village, comfortable with the pointless tedium of having the same conversation they have had for the last 20 years even though it became untethered from reality long years ago?

    To claim that ‘Governments are … incompetent owners of businesses’ is just fatuous, frankly. Go read a little about the histories of Japan, South Korea, China and Singapore, to name just four, and perhaps you might try to make an actually constructive contribution to a discussion instead of engaging in the kind of evidence-free rhetoric we read every day on other blogs.

  37. Scott
    December 3rd, 2012 at 20:27 | #37

    @John Humphreys
    It is not as simple as blaming or excusing government or business from the issue. All this lack of critical thinking will achieve is repeating previous mistakes. Working in banking in the USA during that period it was clear that Fannie and Freddie arrived late to the party. Countrywide and private companies led. http://answers.yahoo.com/question/index?qid=20111222083725AAIt2X0. Working in the private sector adding more to mortgages like boats, additional cars, holidays, etc, etc was quite informational. The Community Reinvestment Act was blamed but this Act was made in 1977 over 30 years before the crisis so why didn’t it cause a crisis sooner? Nhttp://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html. No wonder one person at the time called this “The big lie”.

    It’s quite interesting to consider countrywide mortgages rather than just Freddie and Fanny that were more the intermediary and the finance companies that structured the instruments that went bad and the ratings agencies that couldn’t rate them . Though it really only takes a rudimentary reading of the literature just after this time to find the cause (give you a hint, if you understand the deregulation and the nature of the financial instruments given AAA ratings that certain government people were objecting to you will be in a good place to start understanding(maybe “inside job” or “margin call” may make it a little more clear).

    Jingle Mail – Where to start, when doing recourse anything above a certain amount had to be signed, anything above a larger amount had to have recourse. This is a popular myth trotted out here and probably the worst thought out argument (I lived there and killed myself laughing when I read that) of why it can’t happen here. Few states were non recourse (or jingle mail, only 12 including california) but most were full recourse (every other state). For a list see here: http://www.forecloseddreams.com/recourse_states.

    Distortions in the credit rating agencies? The credit ratings are their own distortions. As one alleged credit rater said that they would structure instruments issued by cows. Richard Koo pointed out that despite rating Japan at risk for over umpteen years there is no hyperinflation or anything like and really anyone who wants to put that to the test can do so by going short in the Japanese bond market. It’s not called the widow maker for nothing. http://www.businessinsider.com/hedge-funds-feeling-confident-about-the-widowmaker-trade-in-japan-2012-12. Kind of like the private electricity market but a tad less brutal.

    You’re oversimplifying Southern Europe, they’re experiencing the result of giving up their currencies to a central body and not having any adjustment mechanism for a huge trade imbalance and it bodes just as badly for the creditors as it does the debtors. Even Milton Friedman commented on why it would be a failure.

  38. Mel
    December 3rd, 2012 at 21:31 | #38

    Has somebody written a definitive book on the causes of the GFC? I would also like to read something that forensically examines and refutes each of the arguments the right use for blaming the GFC on bad government policy.

  39. Chris Warren
    December 3rd, 2012 at 23:56 | #39

    Mel :
    Has somebody written a definitive book on the causes of the GFC? I would also like to read something that forensically examines and refutes each of the arguments the right use for blaming the GFC on bad government policy.

    Yes – Karl Marx, Capital v1-3, if you want a deep explanation.

  40. Newtownian
    December 4th, 2012 at 05:32 | #40

    @Mel
    A single book on the GFC probably cant exist as its too multifactorial and requires taking multiple perspectives. But here are a few items suited to the non-economist which together help explain why superannuation has gone west and HOW the whole monetary system is frighteningly unstable.

    Reading Marx’s ideas in Wiki could be useful as a primer for understanding that money is not a solid entity but a system of quadrillions of microcontracts which put us all in debt to one another until someone says enough. Money/assignment of value is not a totally stable concept but it is stable enough much of the time for trading fun and games. And therein lies the answer to the GFC and all other economic crises and injustices and why some people these days are poor and some rich when there is enough for all – IMHO.

    Other random Wiki entries also help – the entries for example on CDOs and CDSs and other ‘products’ for example illustrate the craziness and uncontrollable complexity at hand.

    Reading Marx’s primary texts is less recommended as you would need to buy into his specific mindset to appreciate it properly – and in so doing lose perspective.

    The following also have insights on different aspects of how the GFC happenned:
    - Satjayat Das’s books Extreme Money and Traders Guns and Money provide a lot of good insights for the spreadsheet inclined as to how the economic system works mechanically, its remarkable lack of sophistication and the weirdness of the money and debt concepts and how they are so fluid.
    - David Harvey has published many good books on neoliberalism from a left perspective such as “A Short History of Neoliberalism” (2005) which said it all a few years before the crisis.
    - Hobsbawm’s ‘Age of Extremes’, derided a little by JR above, provides an excellent potted history for the events leading to the New World Order.
    - A good book on the madness of the financial industry trading and swindling at a human level is ‘House of Cards’ about one of the original failures – Bear Sterns Merchant Bank. Matt Tabbi’s ‘Griftopia’ is another easy read on one of the winners are grinners Goldman Sachs, the housing bubble and the paper machinations leading to the GFC.
    - This party’s host John Quiggin? Aside from his book on Zombies, a useful free article is “Farrell, H., Quiggin, J., 2012. Consensus, Dissensus and Economic Ideas: The Rise and Fall of Keynesianism During the Economic Crisis.” which discusses economic groupthink.

  41. Dan
    December 4th, 2012 at 09:23 | #41

    @Mel

    You could do much worse than Yanis Varoufakis’ The Global Minotaur, or Varoufakis, Halevi and Theocarakis Modern Political Economics (wonkish).

    These both explicitly understand the GFC as multifactorial, which appears differently when viewed through different prisms.

  42. Damien
    December 4th, 2012 at 17:42 | #42

    @John Humphreys

    Ideologically driven nonsense. The GFC was a wall to wall corporate crime spree and the government and the taxpayers were the victims.

    No US federal agency regulates mortgage lending, that’s a province of the states. In 2003 when 50 state Governors, Republican and Democrat, collectively sought to legislate against predatory bank lending practices (of the type that gave rise to the GFC) they were blocked by the US Treasury acting on George Bush’s advice. This was despite a special FBI task force warning Bush of the likely consequences.

    In Oct 2008 Mr Lynn Turner, former chief accountant of the SEC, gave evidence to the US House Oversight Committee investigating the collapse of insurance giant AIG. He testified that the SEC Office of Risk Management, which had oversight responsibility of all US securities, including swaps worth hundreds of trillions of dollars, had been progressively cut by the Bush administration from 146 personnel. By Feb 2008 only one person was left for assessing corporate financial risk management for the entire US securities market!

    In Oct 2008 the New York Times reported on Justice Department data showing “prosecutions of frauds against financial institutions dropped 48 percent from 2000 to 2007, insurance fraud cases plummeted 75 percent, and securities fraud cases dropped 17 percent.” — all on the Bush watch.

    Bill Black, former chief prosecutor of crimes in the US Savings and Loans meltdown of the 1980s, has written extensively claiming that the GFC was wall to wall corporate crime.

    Richard M. Bowen, former chief underwriter for Citigroup’s consumer-lending group, said he warned his superiors that the mortgage loans the companies were selling to customers and then “securitizing” (ie pooling to place on the investment market) were, essentially, fraudulent.

    “In mid-2006, I discovered that over 60 percent of these mortgages purchased and sold were defective [ie likely to be defaulted],” Bowen testified before the Financial Crisis Inquiry Commission created by Congress. “Defective mortgages increased during 2007 to over 80 percent of production.”

    Citibank knew home borrowers were unlikely to pay after two years of low teaser rates that morphed into killer rates yet they lent the money anyway knowing that the securitized investment owners of the mortgage would foreclose and get the house and the risk was off their books.

    And don’t forget MERS, the financial industry database for managing property holdings in pooled investments, an entirely illegal and fraudulent end run around well established US state regulations on property transfers. MERS involved the presentation to the courts of hundreds of thousands of false affidavits by foreclosing banks, affidavits claiming ownership or the sighting of mortgage documents proving those banks had a claim on the properties, documents they never held.

    On Feb 12 2012 Pres. Obama signed off on a deal brokered between all 50 US states, the Federal Government, and the 5 leading US banks largely responsible for the mortgages fiasco. The banks agreed to pay a measly $25 billion into a trust fund to assist those harmed by their criminal behavior. In return they will receive legal immunity from criminal and civil prosecution in relation to the greatest and most expensive crime spree in human history. Over 4 million families lost their homes to foreclosure yet just 750,000 of them will receive a one-time payment of $2,000.

  43. Jim Rose
    December 4th, 2012 at 18:12 | #43

    @Ken_L You mentioned Japan, South Korea, China and Singapore, but not Hong Kong. An oversight? Asian tigers all.

    Alluding to developing countries is wise because the counter-factual is messier and they are so far behind that they can carry plenty of lead in their saddle-bags. Unpacking the box and plugging in proven western technologies lead to great leap forwards aplenty.

    On Singapore and Hong Kong, one relied more on capital accumulation, the other on greater productive efficiency. For that reason, they had similar GDP per capita, but personal consumption per capita was about 20% higher in Hong Kong.

    On Japan, Japanese money politics supposed created the myth that was MITI and the reality that was their ministry of agriculture. I cursed the latter whenever I shopped at the supermarket near my university in Tokyo.

  44. Damien
    December 4th, 2012 at 18:53 | #44

    @Chris Warren

    Chris, I can fill you in on one repeated Right wing lie — that the GFC was caused by Clinton’s repeal of the Glass Steagall Act which had existed from the 1930s in order to separate ordinary savings banks and home loans from riskier investment banking activities.

    The oft-repeated lie that Clinton caused the GFC by repealling the Glass Steagall Act needs to be rejected. The final bill repealling Glass Steagall passed with a veto proof majority in both houses of Congress. Clinton had fought hard against the bill for months and could not have stopped it even by using a stalling Presidential veto. The original version of the bill — put largely by Republicans but with some leading Congressional Democrat supporters (who were later shown to be getting finanical benefits) — threatened to end the Community Reinvestment Act (CRA), a piece of legislation passed by Carter in 1977 that outlawed ‘redlining,’ where notably black and poorer residential areas were targetted by banks for fewer loans and higher mortgage rates. Clinton was faced with a veto-proof majority and so fought to obtain a concession — to remove the sections of the Act repealing the CRA and so to ensure that blacks were not discriminated against in their mortgage applications. The Right wing lie has been that the GFC followed from bad loans made to poor black people that was enabled by Clinton legislation. However, no reduction in loan creditworthiness was ever put forward by Clinton. The CRA legislation remained as it had done since 1977. The increased number of bad mortgage loans that followed the legislation did not do so because of any forced sales to uncreditworthy black or poor people; they followed because the issuing banks were out selling mortgages to anyone who was breathing. The profits were in the on-selling of the mortgages through the securitization process, a scam whereby the banks got the loans off their books (for fat fees) and on to the share market. It was a veritable crime spree by the financial markets who built mountains of unregulated derivatives on the original products way beyond their capital base, often geared at up to 100:1. And that was why the GFC hit so bad. Here’s Clinton himself, in his book ‘Back to Work’:

    “By the time Glass-Steagall was repealed, Federal Reserve rulings, beginning in the late 1980s, had already eliminated restraints on big banks’ ability to engage in both commercial and investment banking activities, except for restrictions on underwriting insurance. The real problem was that both before and after I signed the bill, the Securities and Exchange Commission (SEC), which oversees investment banks, lacked the authority to require them to set aside more cash to cover high-risk investments (though there were other steps a vigorous SEC commissioner could have taken to reduce the risks of a crash), and the bank regulators didn’t do enough to limit commercial banks’ risky loans….I do think I can be fairly criticized for not making a bigger public issue out of the need to regulate financial derivatives. I couldn’t have done anything about it, because the Republican Congress was hostile to all regulations, going so far as to threaten to leave the SEC with no budget because the commissioner, Arthur Levitt, was vigilant in doing his job. But I should have spoken out more, especially after Congress included a measure barring financial derivatives from being regulated as securities or commodities in an appropriations bill that passed by a veto-proof majority. In not doing so, I ignored one of my own rules: even when you can’t win, it’s best to get caught trying.”

    see http://anglachelg.blogspot.com.au/2008/09/political-investment.html

  45. Chris Warren
    December 4th, 2012 at 19:57 | #45

    @Newtownian

    Reading Marx’s primary texts is less recommended as you would need to buy into his specific mindset to appreciate it properly – and in so doing lose perspective.

    You have the wrong end of the stick here. You fail to gain appropriate perspective in the abscence of Marx’s main texts. Unless, that is, you really want to reinvent the wheel and start again from Adam Smith and Ricardo.

    Blaming ‘quadrillions of contracts’ is nothing but barking at the moon. As Marx made clear the GFC is caused by the particular form of appropriating surplus that succeeded earlier fuedal and slave-owning forms.

    Today’s debt phenonema are consequences – not causes. In the long-run, you cannot abolish debt and population cataclysms without abolishing capitalism.

  46. Jordan
    December 4th, 2012 at 21:11 | #46

    @Mel
    If you really want to find causes to GFC, you will have to look at time period between two GFCs; between Great Depression and today, what are the trends in that time period.

    IMO, the cause is the break up of Surplus Circulation as Yanis Varoufakis calls it, but he takes the meaning only to the circulation in the international trade, i prefer to give it to all economic circulation; between rich and poor, between parents and kids, between cities, between regions in a country, between the states in a federation, between the countries in EMU, between the countries on the world stage. Enywhere where there is a surplus and deficit element.
    But with word surplus meaning, not in Marxist sense but in a accounting sense, something that you earned and did not spend on yourself. Like wealthy that could never spend such wealth but accumulate it forever and they die without ever spending it on themselves.
    Like a parent spending their income on kids, like a EMU member Germany spends it by sending it to Greece which will then buy german products. Like in Marshall plan for Europe which gave away bilions of dollars to devasteted economies so they can spend it on US products. Like a rich people making loans to poor people so they can keep buying products of the companies they own.
    And most importantly, Surplus such is taxed away from rich to spend on poor’s safety net.
    Surplus circulation is esential to keep money and trade circulating in the economy. If surplus is accumulated into one sector, such as wealthy, rest of the economy does not have enough to work with in order to trade and flourish.
    Surplus Circulation is just a descriptive synonym for word economy.
    Why it came to the break up of the Surplus Circulation, is another question but without knowing what economy realy is would prevent the answer to what is the cause of the GFC.

  47. Mel
    December 5th, 2012 at 00:12 | #47

    Thanks folks. I had a look at the Amazon comments on the Varoufakis et al books mentioned by Dan. Sounds a little highfalutin for my tastes. Ditto for Chris’s Marx suggestion. I do read some Marx from time to time but I find his economic high economic theory unfathomable.

    I really want something more proximate and I found this paper by David Gruen (from the Australian Treasury) that sets out 13 causal factors. http://archive.treasury.gov.au/documents/1564/HTML/docshell.asp?URL=Sydney_Institute_Speech.htm

    Ross Gittins gives it the Gruen account the thumbs up and I take him seriously. Still, it does leave lots of unanswered questions.

  48. Jordan
    December 5th, 2012 at 01:24 | #48

    @Mel
    Those factors Gruen cites are all true and are short answer to the question of GFC.
    That is just scratching the surface of the question.
    Real answer is in why such conditions developed over and over again as Gruen pointed to repeat financial crises? Why do they reapear after they are fixed?
    Answer is savings glut that is pushing for new ways to invest hence creating bubbles that burst?
    Why is there a savings glut? Keep scratching, please.

  49. Jordan
    December 5th, 2012 at 01:58 | #49

    Or you can go for the answer directly from Yanis Varoufakis. I think this is his most consice and direct speach yet with a bit poor audio quality. I am sure you can get a wide perspective here

    http://yanisvaroufakis.eu/2012/11/22/audio-the-global-minotaur-at-seattle-town-hall/

    But also after getting this answer there is need for more scratching.

  50. Jim Birch
    December 5th, 2012 at 13:14 | #50

    While complaining that we haven’t accepted the implications of deregulation, Nolan doesn’t acknowledge that we never asked for deregulation in the first place, nor does she present any positive case for deregulation. It’s just part of her background assumptions about the way the world works and should work.

    It’s a more than a little revealing that the actual reason she does give for privatisation is not economic, quality of service or any such material concern, but simply to get the damn voters of their backs: If the price goes up or the service goes down, we can’t be blamed! (With the tacit corollary, I guess: hey, we can join the blamers.)

    This indicates a clear failure of something, but I’m not sure if it’s the government or just modern democracy as a whole. The government have taken the view that the whole thing is a PR exercise, just like lobbyists think, and the world needs to be reorganised so they can avoid the heat, whatever the real cost or benefits. This is madness, government by blame shifting. By implication, the voters are so entrenched in making emotional, self-centred decisions that they can’t accept a rise price of services without requiring a pound of some identifiable entity’s flesh. Hopefully the voters are not completely locked onto this path since the logical outcome seems to be to pass management of resources down the blame chain till they end up with people who are completely unresponsive to criticism.

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