When it comes to business commentary by my learned Crikey colleagues, Bernard Keane and Glenn Dyer make fine political and media experts. While their constant regurgitation of secondary-school Keynesian economic theory is entertaining, this week’s bizarre attack on Adam Creighton (and their recent mauling of David Murray) did little to further their credibility.
Keane and Dyer appear to be confident of Australia’s economic invincibility; apparently burgeoning household debt (Australians have a higher proportion of mortgage debt to GDP than the US before its housing collapse) is apparently an irrelevance. That the Australian government lost (which is really what a deficit is) $44 billion doesn’t seem to bother our fearless economic commentators.
Nor does the fact that those tax receipts are being held up by the vestiges of a Chinese government-constructed credit boom. Of course, it’s difficult to maintain services and a bloated public service when tax revenues are dropping and expenses rocketing. (And with unemployment at structural lows and commodities at all-time highs, it would seem impossible to envisage Australia’s fiscal position improving in the coming years).
This was, in essence, Europe (and the US’s) problem. Governments (which are employed by a rump of voters keen to protect their self-interest) have undertaken welfare state projects, which, since the GFC, have finally proved unviable. If the PIIGS governments (and even the US) were actual businesses, they would long have been wound up. The prima facie solution to these woes suggested by Keynesians (led by their oracle Paul Krugman, who famously advocated reducing interest rates in order to inflate a housing bubble in 2001) is to solve a problem created by too much debt and consumption by printing money to create more debt and spur further consumption.
But, according to Keane and Dyer, Australia has nothing to worry about. Why? Because the IMF said we’d all be OK. (Yes, that is the same IMF that was recently run by French Socialist Dominique Strauss-Kahn). In the space of two paragraphs, Keane and Dyer accused Murray of channelling “silly analysis” before noting “the IMF also said last week that the Australian banking system … was well placed to withstand a US-style housing crisis. After it had conducted ‘stress tests’ to see how our banks could cope with a housing collapse like that which hit the US and UK in the past five years – a 5% drop in GDP and 35% fall in house prices.”
Forgive us for thinking those stress tests may not be overly stressful — given that European bank stress tests in 2010 said all was all OK, only to almost take down the entire European economy a year later.
Keane and Dyer then argued that Murray’s views were foolhardy because the credit agencies said Australian was just fine. Crikey‘s economic wonder duo opined: “Not to mention the outlook on Australia being reaffirmed by Moody’s and Standard & Poor’s, at AAA stable. In fact, comments by a senior executive at Moody’s just two weeks ago directly contradict Murray’s thesis. ‘We are very comfortable with Australia’s triple-A ratings because of the government’s very low debt levels compared with other sovereigns in the triple A category’.”
This would presumably be the same Moody’s and Standard & Poor’s that rated hundreds of billions of dollars of US mortgage-backed securities as AAA just before they would be deemed worthless as the housing market collapsed (conveniently, the ratings agencies received handsome fees from issuers of the debt). Or the same Moody’s and Standard & Poor’s that rated Enron “investment grade” until a few days before its bankruptcy.
Keane’s and Dyer’s attack on Creighton was even harsher, perhaps because he dared write (in The Australian no less) that governments should try not to spend more than they can generate in revenue. Keane and Dyer went straight for the man, claiming that “Creighton is too young to remember the pain of the last recession in the 1990s and the impact of the wrenching reforms in the 1980s and 1990s as well – or what happened to a generation of blue-collar male workers when we combined the two.”
Keane and Dyer themselves appear to have minimal grasp of history — themselves living through the fiat money era since 1971. Keane’s and Dyer’s invoking of the reforms of the 1980s (which were the product of a left-wing Australian government) appears especially bizarre. The shift away from manufacturing is a byproduct of Australia’s inability to compete globally in some (but not all) sectors. Keane himself (in some of his very impressive work) has been a staunch defender of government assistance to failing industries.
Ironically, after attacking Creighton, Dyer and Keane actually reached the same conclusion, noting that “looking at all the data, it’s harder to conclude that the economy needs stimulus – to the extent it would get it from a 25-point cut”. And that is correct. The RBA is far from an oracle. While not as hopelessly conflicted as the US Fed, the Reserve Bank board consists of arguably partisan industry players like Heather Ridout and retailers such as Roger Corbett, and once included Solly Lew, Brian Quinn and Frank Lowy.
What should the RBA have done? Well, that depends on who you are. If you’re a responsible saver, or retired or own your home outright, then the RBA’s frantic monetary easing will reduce living standards. If you’re a poorly-managed retailer or over-leveraged home owner, then thank the RBA for its short-sighted approach.