EDITORIAL: by Peter WestmoreNews Weekly
Economic crisis: predicted and predictable
, November 8, 2008
The governor of the Reserve Bank of Australia, Mr Glenn Stevens, should resign to make way for someone who will deal with the causes, not just the symptoms, of the present crisis.The worst of the economic crisis is behind us, Reserve Bank Governor Glenn Stevens suggested in his recent address to the Trans-Tasman Business Circle.
After acknowledging the risks in prediction, he said that "it seems to me that the key elements of dealing with the root issues in the crisis are starting to come into place ... It addresses the issues of liquidity, capital and confidence."
"As a result," he said, "the likelihood of a global catastrophe has in fact declined over the past couple of weeks."
It was at least refreshing that the Reserve Bank governor accepted that there was some
likelihood of "a global catastrophe".
What is unacceptable is that the Reserve Bank and the Australian Treasury, which are supposed to be the custodians of the Australian economy, were apparently unable either to anticipate the current economic crisis or to put in place measures to avert it.
Instead, we have had economic policy development on the run, as the Rudd Government responded to collapsing confidence by injecting billions into the banking system to deal with the liquidity crisis, then later announced that $10 billion from the Budget surplus would be used to make one-off payments to first home-buyers, families and pensioners, then later guaranteed all deposits in banks, building societies and credit unions - before partially changing direction.Long anticipated
The hard fact is that this crisis was predicted long ago, even in the columns of News Weekly
. In the years before his death in 1998, B.A. Santamaria repeatedly warned that the massive growth of the debt economy, with the totally deregulated financial market which developed since the 1980s, was unsustainable.
Back in 1996, an American academic economist, Thomas Palley, wrote an important article in The Atlantic Monthly
titled, "The forces making for an economic collapse".
Noting the soaring level of debt in the United States at the business, personal and government levels, he said, "The high level of indebtedness in the US economy implies that if prices and wages start falling, spending and fresh borrowing will most likely collapse, and bankruptcies will rocket. The economy could then find itself in a contractionary spiral, with wage deflation feeding a collapse in spending, and collapsing spending feeding further wage deflation." (Atlantic Monthly
, July 1996).
Economic historian and author Eamonn Fingleton recently wrote, "After all, it was not as if the crisis came as a complete surprise. As far back as 2002, the inflating bubble was presciently identified by Dean Baker, as well as by Warren Buffett. Yale economist Robert Shiller and financier Jim Rogers were among others who saw the disaster coming, and the Basel-based Bank of International Settlements gave [US Treasury Secretary Henry] Paulson a particularly blunt warning in the summer of 2007." (The American Conservative
, October 20, 2008).
While we can probably be grateful that Mr Glenn Stevens has recognised that the world was on the brink of a financial catastrophe, he showed little sign of accepting what caused the crash, and what is needed to prevent the next one.
He said, "The question, then, is how to restore confidence and stability to these important markets and institutions. The first thing is to continue to provide liquidity."
Anatole Kaletsky, writing in the London Times
, identified the causes in these terms: "Since the early 1990s, regulatory changes, inspired by an over-zealous belief in free-market economics, have intensified boom-bust cycles. These regulatory distortions have rested on the naïve belief that 'the market is always right'.
"The greatest irony is that the last adherents of this free market dogma are the financial regulators whose raison d'être is to guard against situations when the markets are dangerously wrong, but who still insist, for example, that energy prices are never manipulated by speculation or that governments must draw black and white distinctions between shareholders and creditors of troubled banks." (The Times
, London, September 15, 2008).
Mr Stevens's assertion that "the key elements of dealing with the root issues in the crisis are starting to come into place", is wishful thinking, like his repeated assertions over the past 12 months that Australia's financial system is sound, when the country's net foreign debt has soared above $600 billion, and we are now heavily, or around 50 per cent, dependent on our trade with China, along with our gas and mineral exports.
Along with our vulnerability to the global meltdown, the Reserve Banks's effective abandonment of the policy to control inflation could itself push Australia into stagflation (i.e., economic stagnation combined with inflation), which the World Bank's former chief economist, Joseph Stiglitz, has described as the major threat to the global economy and "the worst of both worlds".
Mr Stevens should resign to make way for someone who will deal with the causes, not just the symptoms, of the present crisis.- Peter Westmore is national president of the National Civic Council.